Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 10

Should You Need a License to Shampoo a Dog?
State governments license many occupations and impose stiff legal penalties on people who run a business without a license. For some of these occupations, licensing is clearly warranted- no one wants to be treated by a quack doctor, for example. However, in other cases, licensing restrictions may go too far. Many states license such occupations as dog groomers and golfcourse designers. Here we look in more detail at three specific cases of how such licensing creates monopoly.
Funeral Services 1
Funeral services are a big business in the United States, with consumers spending as much in this market as on movie tickets. All U.S. states have regulations on funeral services, restricting entry to licensed providers. This may come as no surprise; one shudders at the grim thought of shortcuts taken by fly-by-night embalmers. Some states have gone further, restricting consumers from buying caskets from anywhere but funeral homes. With retailers like Costco retailers touting competitive prices for caskets ordered over the Internet ("starting at $949 delivered,") the consumer benefit from casket regulation is not obvious. A study comparing prices across states found that sales restrictions raised casket prices by a third. However, funeral homes in other states ended up charging more for other funeral services, so that the overall bill for a burial was about the same. Evidently, the entry restrictions are sufficient to enable funeral directors to extract a target sum from each bereaved family, whether the target is achieved by marking up caskets, embalming, or other service.
Liquor Stores and Wine on the Web
Following the repeal of Prohibition, states adopted a variety of restrictions on how alcoholic beverages can be sold. Currently, 18 states operate liquor-store monopolies. In these states, consumers must purchase such beverages from a "state store," and usually they pay extra. In most of the other states, liquor stores are licensed and subject to restrictions on pricing, advertising, and wholesale distribution. There is considerable evidence that alcoholic beverages are more expensive in states with the most restrictive entry laws. Recently, the emergence of Internet sites that sell wine have challenged local liquor monopolies. In 2005 the U.S. Supreme Court ruled that restrictions on interstate sales of wine violated the Commerce Clause of the Constitution, but gave states some leeway in how they might adjust their laws. Some, such as New York, quickly amended their laws to make most Internet wine sales legal. Many other states, however, have continued to make it difficult to buy wine over the Internet. One reason often given for their foot-dragging is to prevent teenagers from buying merlot over the Web. A more likely rationale is simply to protect the profits (and political contributions) of local wine sellers.
Taxicabs
Many cities limit entry of taxicabs just to specially licensed operators. Ostensibly, the purpose of such regulation is to weed out unscrupulous cab drivers who might overcharge passengers new to town. This rationale is not wholly consistent with evidence that tends to show that taxi fares are higher in regulated markets. One study of Toronto, for example, found that prices are about 225 percent higher than would prevail in an unregulated market. 2
In New York City, the licenses for taxicab operation are medallions, which must be displayed on the outside of the cab. Over 13,000 medallions have been issued, which sounds like a lot, but in the city the size of New York, this represents a tight restriction. Some idea of how tight comes from periodic auctions in which operators sell their medallions to the highest bidder. In a recent auction, the price for a single medallion rose well over $1 million.
Can you think of good reasons for regulating entry into the businesses described in this application? How would you determine whether these goals are met?