Jagadhari #1 and the Third law of demand

I graduated from NIT Kurukshetra (RECK back then), Haryana in 2000. That is, I started college in the same month and year the state went dry. It was a bit of shock to realize that not only was alcohol off limits but non-vegetarian food was also banned in the holy city of Kurukshetra. Talk about a double whammy.

A little background – Haryana Vikas Party – BJP alliance campaigned on the slogan of prohibition and won the assembly elections in 1996. Banning alcohol was their first order of business. In spite of warnings of loss of revenues, the emergence of liquor mafia and the practical difficulty of enforcing such a ban in a landlocked state surrounded by Punjab, Delhi, and Rajasthan (none of which had such prohibitions) the government decided to go ahead with the ban. This prohibition, like most others such experiments, ended up a disaster and was lifted in April 1998. The misadventure cost the taxpayers Rs.1200 crore in lost revenues alone. Countless people were imprisoned, and many ended up with a criminal record for something that was no longer a crime.

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And now to Jagadhari Number 1. The ban was brutal for those of us who came to RECK seeking a carefree life for four years filled with some if not regular sessions of inebriation. The only way to procure alcohol then was to seek out your local thele /rickshaw walla for the stuff available on the black market. And the only spirit that fit into our meager budget was always Jagadhri #1. Jagadhri #1 was(is?) a highly potent locally brewed(desi) whiskey and apparently quite popular among the locals. Jagadhri got the job done for us back then, and after the ban was lifted in 1998, I don’t think any of us ever went back to it.

What is interesting, thinking back about it now, was why Jagadhri #1 was the only spirit available in the market during that period. And the answer I think lies in the Alchian-Allen effect. The Alchian-Allen Theorem also called the third law of demand, says that when a fixed cost is added to substitutable goods, the more expensive one becomes relatively inexpensive.

Let me illustrate with an example. Say the best  variety (A) of Indian Mangoes costs £10 per box, and the standard variety (B) costs £5 for the same box in India. But say shipping to the UK is a flat £5 per box. Now the cost of the same box in the UK is £15 for the A and £10 for B. That is the relative price of A in India is 2 boxes of B whereas in the UK it is only 1.5 boxes of B. In other words variety (A) is relatively cheaper in the US compared to what it is in India and hence consumers should prefer to buy A to B.  The best stuff gets shipped out ! This is perhaps a reason why Indian groceries/produce you find in the US/UK are sometimes better than what you get back home.

How does this logic work for Jagadhri #1 then? The prohibition  imposed a set of fixed costs on the buyers and sellers. The risk of getting caught, potential for fine and incarceration raises the fixed costs of consuming alcohol (similar to the transportation costs in above example) making a potent Jagadhri more attractive compared to the alternatives. It is just not worth the trouble to smuggle a beer when you could get a bottle of Jagadhri which gives you a bigger ‘kick’ when the risk that you bear in smuggling either of them is the same.

Sad, but an important thing to keep in mind every time you read about tainted alcohol killing people in dry states like Bihar. Perhaps someone was trying to maximize his alcohol to risk equation and got the balance wrong.