Many jurisdictions strictly limit sales of hard liquor (liquor with a significantly higher alcohol content than wine) in an effort to limit the associated negative externalities. (De Melo et. al., 2013). One approach is to impose a high tax on sales of such products. Another approach is to require sellers to obtain licenses and to limit the number of licenses to the socially desirable number. Often these licenses are sold to the highest bidder. Frequently, the price of such licenses is set at a low enough level that extensive excess demand for licenses occurs at that price.
a. Under what circumstances would auctioning licenses be equivalent to a tax?
b. Why might regulators or politicians favor underpricing of liquor licenses?