Local rent creation: alcohol edition

By Eric Crampton 19/06/2013


I’m not sure that Wellington Council, and the other local bodies, are setting out to create rents for property owners in soon-to-be-designated “fun” districts, but that’s what they’re soon to achieve.

The alcohol reform legislation pushed alcohol regulation back to local bodies; local busybodies have consequently gotten busy lobbying local councils to restrict hours of operation and number of licencees. This was pretty predictable. Industry has an easier time pointing out problems with proposed regulations to central government than fighting all the local low-opportunity-cost types at all the various local Councils. 
Dominic over at The Ladder (HT: @EpicBeer , see also TVHE) absolutely nails the economics of the latest round of local proposals. Wellington Council is considering a local alcohol policy that would designate a nightlife zone with 3 am closing times while setting earlier closing times elsewhere in town. Dominic’s substantial points:
  • Courtenay Place, the proposed designated nightlife zone, is only the current nightlife hotspot. Cities evolve and so does nightlife; when one district starts stagnating, a new one emerges. The zoning would lock the current pattern in place forever. In fact, Courtenay Place is on the downturn:

    The trouble is that nightlife districts have a life cycle. They don’t spring up and stay interesting and youthful forever. They stagnate and get superseded by other districts. That stagnation happened about ten years ago in Courtenay Place. It’s now a big brewery-controlled, noisy, cigarette smoke-filled (that’s right) ghetto. The trouble is that no-one has told the Council or the Hospitality Association. Courtenay Place has become a model for everything that can go wrong in a nightlife district. Do I need to make the case here? I hope not.

    We’ve seen the same movement around Christchurch, even pre-earthquake. The Strip was the place when we’d moved here, but was on the downturn when the quakes hit. And since the quakes, Riccarton, Papanui, Sydenham and Woolston have picked up. They wouldn’t have if Christchurch had the kind of regulation that Wellington is proposing. And if you imagine that a Council couldn’t be daft enough to continue enforcing a nightlife-zone after an earthquake demolished the nightlife zone, you haven’t been following post-Quake Christchurch closely enough.

  • The nightlife-zoned areas will, by virtue of regulatory protection, get substantial rents. These will be capitalised into the price of properties in that district.

    But the Council, who seem to think the scenes in Courtenay Place late on Fridays and Saturdays represent “vibrancy”, and the Hospitality Association, led by individuals who, I believe, own businesses in Courtenay Place, are planning a regime that will penalise anyone trying to establish a business anywhere else – businesses that might give discerning consumers an alternative to the chaos on Courtenay Place. It may not be what the Council intended, but it’s what’s called an unintended consequence. It’s what happens when you draw lines on a map and create differences between the two sides.

    Of course not all the results will penalise businesses outside the strip. If you’re a Courtenay Place property owner learning that your tenants have privileges with respect to liquor licensing, you’re going to put their rent up. I look forward to hearing the Hospitality Association complaining about sky-rocketing rents in the street in about a year’s time.

    Dominic is absolutely correct here. If we’ve learned anything from Public Choice, it should be that we really really really shouldn’t go about conferring rents in this way. Current owners will get a one-off bump in property values, but then will only be earning normal returns on that capital value. And they will scream if you ever try deregulating it.

Christchurch is considering the same kind of lunacy in its local alcohol policy deliberations: they want to push all the nightlife into the now-deserted downtown. In doing so they will severely punish everyone who got off their arses in the last couple of years and helped make Christchurch less awful by getting new venues going in new areas. 
Admiral Akbar Tullock screams at you, “IT’S A TRANSITIONAL-GAINS TRAP!!” It’s happened before: just look at New Jersey and Manitoba. 
Please listen to Admiral Tullock. Before it’s too late.