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Tesla Sales Ban in New Jersey: A Clash of Special Interests

By: Nick Zaiac - @NickZaiac - Mar 13, 2014, 8:19 am

Tesla Motors has suffered another defeat at the hands of state government. The company was barred from selling cars in New Jersey due to a set of rules making it illegal to sell directly to consumers.

Given that direct sales are integral to the company’s business model, the electric car maker has struggled with such regulations, which mandate the traditional middleman of franchised car dealerships.

tesla-model-s
Tesla Model S. Source: Tesla.

The decision by the Chris Christie (R-NJ) administration is blatant pandering to the auto dealers’ lobby. This is not a new hurdle for Elon Musk’s company, however, which has been barred from both selling and servicing its cars in Texas, and numerous other states have similar rules, most notably Arizona, currently in the running for a Tesla manufacturing plant.

There is a notable irony to this development. US taxpayers originally financed Tesla via a US$465 million loan from the Department of Energy. Moreover, people who buy these cars are eligible for tax credits from the federal government, and many state governments, of up to US$7,500 at each level. All of this amounts to a massive incentive for people to buy electric cars.

Tesla’s struggle is also not unheard of; indeed, it parallels a similar battle that has been going on in the alcohol industry for decades. Many states have laws that ban the direct sale of alcohol from producers to consumers, mandating that wine, beer, and/or liquor must pass through franchised wholesalers first. This “three-tier” system ensures the profits of alcohol wholesalers, who have a massive incentive to lobby to prevent any threat to the franchise system.

With respect to Tesla, politicians seem to be stuck between two powerful lobby groups, both advocating for bad things in different ways. In one corner, environmentalists seek to encourage electric-car use via public subsidies. In the other corner, the auto dealers seek to protect their market share and do all they can to prevent competition. Franchise mandates also help traditional auto companies by making it harder for new, upstart companies to compete on price, encouraging the automakers to support the dealer networks as well.

Ideally, all government regulations, including these, should be the result of cost-benefit analysis, factoring in the interests of all relevant groups. In this case, it seems as though only two interests are being represented, and the public policy outcome is a result of both groups’ misguided attempts to protect vested interests.

Notably absent from the debate are the interests of the taxpayer and the consumer. The taxpayer is on the hook for the costs of all of the tax credits given for purchases of cars such as Tesla’s, and the loss of choice to consumers is barely mentioned in this debate at all.

It makes sense that this would happen. Basic public choice economics explains that when the government leaves open the opportunity for targeted, preferential treatment, some people will seek to apply exactly that.

If the government were to lose or forgo the power to pick winners and losers in the marketplace, then companies would be forced to profit only on the products they sell, rather than the people they know. Both the taxpayers and consumers end up better off, and society would end up more prosperous overall.

Tesla executives should be able to use whatever sales model they so choose, and they should reap the profits or incur the losses they earn.

Nick Zaiac Nick Zaiac

Nick Zaiac is a public-policy researcher in Washington, DC. He also serves as a policy analyst at the Maryland Public Policy Institute. His column, The DC Leviathan focuses on the often-ignored bureaucratic agencies, from the Department of the Interior to the General Services Administration. He has been published in the Baltimore Sun, City AM, CapX, and other outlets. Follow @NickZaiac.