Entry into the craft brewing industry is difficult, as aspiring brewers are burdened with regulations at the local, state, and federal levels. New research by the Mercatus Center at George Mason University finds that excessive craft brewing regulations limit competition, stifle innovation, and reduce consumer welfare.
In fact, starting a microbrewery in Virginia requires as many procedures—and takes as long—as starting a small business in China or Venezuela, countries notorious for their excessive barriers to entry.
In many cases these laws, which were initially intended to curtail overconsumption, increase the power of established brewers and wholesalers. Senior research fellow Matthew Mitchell and program manager Christopher Koopman find:
State and federal beer regulations can privilege established brewers and distributors at the expense of customers and entrepreneurs trying to enter the market.
Although these regulations are imposed on all firms regardless of size, smaller firms are affected to a greater degree because larger firms can more easily comply with the rules. Large, established firms benefit from these rules since they raise their rivals’ costs.
After prohibition ended in 1934, states enacted a “three-tier system” which mandated that suppliers, wholesalers, and retailers all remain separate. By preventing a supplier from selling directly to consumers, distributors are able to claim a considerable share of the economic benefit that would otherwise flow to the brewer or consumer.
An aspiring brewer must comply with a number of permits and authorizations which often overlap at the local, state, and federal levels—adding unnecessary layers of bureaucracy and duplicative rules.
In Virginia, a license can be refused if the state believes the brewer is “physically unable to carry on the business,” is not a person of “good moral character and repute,” fails to demonstrate the “financial responsibility sufficient to meet the requirements of the business,” or is unable to “speak, understand, read, and write the English language in a reasonably satisfactory manner.” The state may even refuse to grant a license if it feels that there are enough brewers in the locality.
An entrepreneur in Virginia, for example, looking to start a brewery faces as many as 12 regulatory procedures, a wait time in excess of 100 days to complete these procedures, and a $2,150 brewery license.
Many policymakers offer targeted benefits to help them overcome these barriers. Instead, policymakers should reduce the tangle of regulatory burdens craft brewers face. Streamlining regulations for all firms would allow brewers to succeed or fail based on their ability to provide the greatest value to consumers at the lowest cost.