Here’s Matt:

It occurs to me that you can think of the policy debate around auctioning carbon permits as an example of a very general phenomenon. Whenever you enact regulations aimed at restricting an activity, but not aimed at outright banning the activity, you create a kind of “regulatory surplus.” A question then arises of how to allocate the surplus.

For example, currently in Washington DC there’s a moratorium on issuing new liquor licenses in Adams-Morgan. The area already has tons of bars and restaurants and its main commercial strip is very rowdy Thursday, Friday, and Saturday nights. Consequently, most local residents favor the moratorium as a way of preventing the neighborhood from getting even crazier. One side consequence of this policy, however, is to provide a massive subsidy to existing holders of Adams-Morgan liquor licenses. This is basically the equivalent of when you give emissions permits away. The city could come up with an alternative scheme that’s aimed at trying to capture more of the regulatory surplus for public purposes. Instead of saying “no new bars in Adams-Morgan” you could cap the number of bars in Adams-Morgan at its existing level and then establish an annual auction for the right to operate a bar. That way, new competition could come to the neighborhood but if and only some entrepreneur was interested in outbidding one of the incumbents for the license. This could generate a lot of money, some of which could be earmarked for specific neighborhood improvement schemes and some of which could go into the general city treasure chest to improve services or reduce other taxes.

The money might also be used to subsidize rents at non-bar commercial locations, which are priced at levels appropriate given bar margins but which render most other uses unprofitable. Vacants aren’t good for anyone.

This is a less ideal policy than simply letting folks operate the business they want to operate, but Matt’s point is that given heavy public pressure to limit the number of bars in an area, what’s the best way to accomplish that limitation without excessively damaging the local comnunity and retail environment.