To Beer or Not to Beer?
A complex governmental solution to a simple economic problem
6 Jul 2007 in Regulatory Economics, Regulatory Policy
The Indiana legislature has enacted a law making it a crime to recycle beer kegs. Apparently, their value as scrap metal exceeds the deposits beer distributors charge, so a lot of empty kegs wind up being sold to scrap metal dealers.
Solving this problem through governmental action was a lot more complicated than solving it through markets. And it might not work.
Emily Fredrix of the Associated Press reports that beer distributors collect deposits of $10 to $30 on full kegs and refund the amount when they are returned (presumably) empty. The problem is that too many kegs are not being returned. They say empty kegs aresold to scrap metal dealers because they are worth $15 to $55 in tbe scrap metal market.
There's a simple market-based solution to this problem, but more on that later. First, we describe the complex governmental solution.
HOW TO USE GOVERNMENT TO REGULATE THE DISPOSITION OF EMPTY BEER KEGS
Indiana's HB 1324, which became effective on July 1, attempts to solve this problem by regulation. The steps involved are lengthy.
First, the legislature had to start with existing statutory terms of art. "Valuable metal" is defined as:
any product made of copper, copper alloy, brass, aluminum, or aluminum alloy that is readily used or useable:
(1) by a public utility, railroad, county, city or state highway department, public or private school, or an institution of higher education; or
(2) on residential or commercial property.
(2) on residential or commercial property.
The underlined portions are new, and were necessary to include beer kegs.
A "valuable metal dealer" is defined as:
any individual, firm, corporation, limited liability company, or partnership engaged in the business of purchasing and reselling valuable metal either at a permanently established place of business or in connection with a business of an itinerant nature, including junk shops, junk yards, junk stores, auto wreckers, scrap metal dealers or processors, salvage yards, collectors of or dealers in junk, and junk carts or trucks.
Second, there has to be an enforcement hook. Valuable Metal Dealers are required to obtain information from each seller, which now includes proof of the seller's identity.
The valuable metal dealer shall verify the identity of the person from whom the valuable metal was purchased by use of a government issued photographic identification. The dealer shall enter on the form the type of government issued photographic identification used to verify the identity of the person from whom the valuable metal was purchased, together with the:
(A) name of the government agency that issued the photographic identification; and
(B) identification number present on the government issued photographic identification.
(B) identification number present on the government issued photographic identification.
Third, knowing their customers isn't enough. Valuable Metal Dealers have to keep records on forms provided by the state police and retain this information for two years "in a separate book or register."
A valuable metal dealer shall make and retain a copy of the government issued photographic identification described under subsection (a)(4) used to verify the identity of the person from whom valuable metal was purchased. However, a valuable metal dealer is not required to make a copy of a government issued photographic identification used under subsection (a)(4) to verify the identity of the person from whom valuable metal is purchased if the valuable metal dealer has retained a copy of a person's government issued photographic identification from a prior purchase from the person by the valuable metal dealer.
Previously, the law required sellers to prove ownership and required buyers to report sellers to the police:
Within twenty-four (24) hours from the date of purchase of a valuable metal
the valuable metal dealer shall notify the local law enforcement agency in writing or orally of the description of the purchase and the name of the individual who sold the product to the dealer. Notification is not required for such purchases if a bill of sale or other evidence of ownership is presented at the time of the sale of the product to the dealer from a public utility, railroad, county, city or state highway department, public or private school, or a postsecondary educational institution.
This provision appears to have been stricken from the law. It's not clear whether the police had been deluged with paper that the police didn't want to retain, or the provision had fallen into disuse.
In any case, with all this as prelude, now comes the new statutory text aimed at beer kegs:
A valuable metal dealer may not accept a damaged or an undamaged metal beer keg if either of the following applies:
(1) The keg is clearly marked as the property of a brewery manufacturer.
(2) The keg's identification markings have been made illegible.
HOW TO USE MARKETS TO REGULATE THE DISPOSITION OF EMPTY BEER KEGS
The economic problem is that the deposit is lower that the value of a keg in the scrap metal market. If distributors raised the deposit so that it was higher than the scrap metal value, those who possess empty beer kegs would return them to retailers to collect their deposits instead of selling them to Valuable Metal Dealers. This does not ensure that kegs would be returned undamaged, but neither does HB 1324. In fact, HB 1324 does nothing to motivate possessors of empty beer kegs to return them to beer retailers. It only tries to make it harder to sell empty kegs to Valuable Metal Dealers.
Note also that this regulatory approach relies on an enforcement structure that penalizes those who buy empty kegs as scrap metal and not those who buy full kegs but fail to return them. Beer retailers also are off the hook, which gives a hint why the law is written the way it is.
WHY IS THE INEFFICIENT AND INEFFECTIVE GOVERNMENT SOLUTION PREFERRED TO THE EFFICIENT AND EFFECTIVE MARKET SOLUTION?
Beer distributors don't like the effective and efficient market-based solution because they are afraid they will deter sales.
The Beer Institute supports legislation in states that require, for example, scrap metal buyers to ask for identification from would-be sellers of kegs, among other items. Ten states so far this year have passed such laws, including Colorado, Indiana, Kansas and Virginia.
Another option is to raise keg deposits, which are set by either states, brewers, or distributors and wholesalers. Brewers charge their own deposits when they sell kegs to distributors and wholesalers, sometimes as small as $10. Then customers pay their own deposit for kegs. Michigan recently tripled its keg deposit to $30 for the average keg-buyer after getting pressure from brewers upset by the thefts.
But [Beer Institute president Jeff] Becker said raising deposits is a last resort, because it could deter drinkers. They hope to curb thefts through awareness.
Another option is to raise keg deposits, which are set by either states, brewers, or distributors and wholesalers. Brewers charge their own deposits when they sell kegs to distributors and wholesalers, sometimes as small as $10. Then customers pay their own deposit for kegs. Michigan recently tripled its keg deposit to $30 for the average keg-buyer after getting pressure from brewers upset by the thefts.
But [Beer Institute president Jeff] Becker said raising deposits is a last resort, because it could deter drinkers. They hope to curb thefts through awareness.
Valuable Metal Dealers are targeted because they are not the direct or indirect customers of beer distributors, who have a problem with unreturned kegs.
And that's why government is called in to solve a simple economic problem through regulation.
From T.O.M. on 7 July 2007, 12:30
See LA Times story