Imagine you want to open a new business in a town. The main street of this town is ten miles long and the residents are equally distributed along the street. Where would you locate your business? It may seem that if you are the only business, it does not matter where you are physically located, but some places are better than others. Locating at one of the ends may mean that the travel costs end up being so high, that some residents will choose not to buy at all. Remember, trade is voluntary, you can always choose not to buy. If you are located in the center of town, you will minimize the travel costs of all the residents and maximize your profit.
Suppose you are a successful business; you employ several workers and earn a decent profit. Another company sees the opportunity to also make money and wishes to enter the industry. Where will they be located? Harold Hotelling showed in 1929 that the best position is right next door to your business. To see why, examine the diagram below. If the orange company is located halfway between the end and the blue company, they will only get 3/8th of the customers. If they move opposite blue, they get half the customers. Look around Augusta and see Home Depot and Lowes close to each other, or CVS and Walgreens, or gas stations.
So, why would a government restrict where firms can locate their business as Columbia County is thinking of doing with Tattoo Studios? They are considering a law that would only allow tattoo studios to be more than a mile apart. There is a similar law restricting the location of liquor stores. Such laws limit an entrepreneur’s ability to earn a profit, employ local workers, and contribute to the economy. They also increase the cost to consumers. Note that Columbia County does not have similar laws against the location of gas stations or home improvement stores.
Trade is voluntary. If you don’t think a bottle of wine is worth $12, you don’t have to buy it. If you don’t think a tattoo is worth $200, don’t get one! The government should not be trying to restrict voluntary trade, it harms the consumer, businesses, and our economy.
