Laws passed by government naturally create incentives for certain types of behavior and disincentives for others.

For example, federal credits for solar panels have created booming solar energy businesses. But if the federal government were to remove those credits, multimillion dollar businesses could crumble within months.

Market distortion

Government laws create market distortions that are hard to undo.

Market distortions happen on a state level, too. For example, Colorado only permits grocery stores to sell alcohol that has 3.2% alcohol content or less. This severely limits what grocers can sell.

The consequence of this law is that Colorado has many large liquor stores that provide the market with what grocery stores can’t. Many of these liquor stores are right next to grocery stores.

A couple years ago, Coloradans got to vote on whether or not to remove the restrictions on grocery stores. Unfortunately, they voted for the status quo, so nothing changed.

A big reason the law failed is because of the amount of pain it would cause to owners of liquor stores. If grocery stores were suddenly permitted to sell liquor, 50% or more of liquor stores would close within a year.

Shouldn’t grocery stores be allowed to sell liquor if they want to? Yes. In fact, many other states permit them to. But the current Colorado laws have created a market distortion that is now difficult to undo.

Right now, multiple states have banned Tesla from selling cars in their states to protect the long-established car dealership model of selling cars.

Politicians are essentially using the law to protect car dealers from having to adapt to a major change in the business climate.

But just like Colorado’s outdated liquor laws, this state-sponsored market distortion will only postpone the pain and make it even worse when the change finally comes.