4. Suppose that the government uses licensing to limit the number of firms in the retail liquor industry. Thus, ignoring the cost of a license, firms in the industry make substantial economic profit.

(a) Analyze the price, costs, and profits of firms when the limited number of licenses

(good for five years) are auctioned off to the highest bidders. Assume that ownership of the licenses is widespread, so there is no problem of collusion.

(b) Analyze the price, costs, and profits of firms when the limited number of licenses are granted "free" to persons approved by a committee appointed by the legislature (or governor).

(c) When choosing between these two, state legislatures have almost exclusively chosen

(b) . Can you explain why?