Why Do We Regulate Wine?

In many ways, our class has been an exploration of the failures of regulation in the wine industry.  Our first guest from a winery, Caroline Wente, discussed her frustration with the outsized power of distributors largely attributable to their favorable regulatory position.  Tracy Genesen litigated a case before the United States Supreme Court successfully loosening the states’ vice grip on out-of-state imports.  Ann Baum contributed a great blog post called "Canned Wine -- More Obscure Regulation Hampering the Industry."

All agree that without the labyrinthine framework of state, federal, and Constitutional law to deal with, wine would ship more freely to more people, and producers and consumers would be better off.  So why do we regulate wine?

James Thornton, in American Wine Economics, sets forth an economic and public interest theory as to why we regulate wine.

From an economic perspective, Thornton raises three justifications for government interference with the wine market.  First, wine creates externalities.  A consumer who enjoys a bottle of wine at a restaurant then causes an accident while driving home due to her impairment does not internalize the cost of her actions absent perfect insurance markets.  She pays for the price of the bottle, but not for the medical costs and repairs associated with the accident.  Extrapolating from this example, these externalities indicate that too much wine would be produced and consumed in the United States without regulation.  Tools like taxes and regulatory restrictions allow the government to bring consumption back in line with the socially optimal level. This is illustrated by the graph below where the PMB line indicates demand with externalities, and the SMB line indicates demand with the costs of such externalities internalized by the consumer.  The dead weight welfare loss created by the difference between these two lines is indicated as well.  Regulation, when done correctly, can bring these two curves closer together, and bring society to a more optimal place.

Second, to make the rational choices that lead to efficient markets, consumers need cheap information.  If they do not have access to complete information or are not able to understand it, they will make irrational choices.  For example, if people are unaware of the health benefits of drinking wine in moderation, they may abstain, which would lead to higher healthcare costs.  The government can intervene by investing in research and publishing information to educate consumers.

Finally, Thornton points to the antitrust case for wine regulation.  Absent interference, producers, distributors and retailers may engage in anticompetitive behavior and gain damaging market power. 

Our current system of regulation may succeed on the first and second poinst but fails on the third. 

Regulations and taxes certainly increase the cost to the consumer of drinking wine.  Quantifying whether the level of cost increase is in keeping with the actual externalities associated with drinking wine is challenging, but it is likely in the right direction.

On the information production front, government regulations do require wine manufacturers to state the risks of drinking while pregnant and of operating heavy machinery while inebriated.  There is also much public investment in consumer education about the dangers of drinking and driving.  The public media takes care of informing readers about new studies about the health benefits of wine in moderation.

Finally, the system utterly fails on the antitrust front.  The wine wholesaler market is dominated by Southern Glazer’s, and revenues at the top three wholesalers equal half the total value of the U.S. wine market.[1]  The market power effects of this structure are evident at every tier of the United States system.  However, contrary to the tone of our class previously, this may call more government involvement, not less, in the form of antitrust action.

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[1] https://www.forbes.com/sites/thomaspellechia/2017/09/20/revenues-at-three-wine-distributors-tally-almost-half-of-the-u-s-wine-market-value/#37b43113299f