Measuring the Unequal Implications of One Size Fits All Regulation

We study the implications to consumers of simple one size fits all regulation when consumer tastes are heterogeneous. In particular we focus on spirit sales in the state of Pennsylvania where the Pennsylvania Liquor Control Board administers the sales of spirits and is mandated to charge a uniform 30% markup on all products. We show that consumer tastes vary systematically with demographics and use an estimated discrete choice model of demand for spirits to assess the implications of this simple regulatory policy on different consumer groups. We find the current regulation results in the implicit taxation of high-income and educated households by raising the prices of spirits they prefer (vodka and whiskey) while lowering the price of products favored by low-income and minority households (gin and rum). We identify more sophisticated pricing regulations which increase total welfare, though the resulting transfer of surplus across demographic groups makes them politically infeasible.