State law limits free market

When the story of the closing of the George Washington Bridge broke, individuals were amazed that such brazen action was taken by New Jersey Gov. Chris Christie’s administration in efforts to retaliate against a mayor who did not provide his political blessing to Christie’s campaign. Now, New Jersey state politicians have another medal to hang from their Trophy Case of Bad Decisions: the legislation that bars Tesla Motors, Inc., an electric car company founded by Elon Musk, from using its direct sales business model to sell cars to consumers in New Jersey.

On March 11, New Jersey’s Motor Vehicle Commission voted to enforce a law that prevents new automobiles from being sold by any entity except for an independently franchised dealer. The vote effectively prevents Tesla from maintaining its current operations in New Jersey. This law not only bars progress for electric vehicles, but is also a significant blow to free market principles, and is a demonstration of the protection of car dealerships throughout the United States.

The laws related to the protection of car dealerships can be found in every state in the nation, given that approximately 20 percent of all state sales tax revenue is generated by new car sales. A study conducted by two economists from the University of Michigan and Yale University found that “all states require that car dealers be licensed,” making it illegal for companies such as Ford, GM, or Tesla to sell their cars unless they go through an independently licensed dealership. Besides being destructive to a free market, these laws ultimately pass on extra costs to consumers.

In all phases of a dealership’s life, there tends to be state legislation protecting an incumbent dealership. If a manufacturer decides that a new dealership is needed in an area, it must prove that the need is there and that it will not infringe upon the current dealer’s “Relevant Market Area.”

A dealership can only be terminated by a manufacturer if it demonstrates “good cause,” a broad classification that gives dealerships a sufficient margin of legal protection. Even if a manufacturer has ample reason to close a dealership, the manufacturer must buy back the dealership’s new-car inventories, as well as its parts and supplies.

Many of these regulations stem from the belief that dealerships will provide better service and prices than a showroom run by the corporation itself. These assumptions are misguided. One study found that dealership restraints imposed by the government led to higher prices, higher costs, shorter store hours and lower consumption – all of which hurt the consumer.

Due to this regulation, more cost-effective distribution models, such as direct and online sales, are being stifled. Consumers need to realize that many state governments are using legislation to protect an industry that imposes unnecessary costs onto their constituents. This is an egregious misuse of the law.

What is perhaps most disappointing about the laws taken specifically against Tesla is where they have occurred. In New Jersey, the governor is a potential future presidential candidate for the Republican Party, a party that espouses its belief in the free market. The two other states that currently have bans on Tesla’s direct sales model are Texas and Arizona, bastions of the GOP. Such policies are evidence of the hypocrisy of political rhetoric.

Luckily, consumers have power through the purchases they make and the votes they cast. As Milton Friedman once wrote, “Our society is what we make it.” We should make it a society that prevents favoritism and promotes free market principles, allowing our government to be “our servant and not letting it become our master.”


Paul Ryan is a junior majoring in economics and finance.

April 9, 2014


Paul Ryan

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