Marijuana

Monopolistic Competition: Marijuana Markets

May 21, 2013 • Businesses, Demand, Supply, and Markets, Government, Households, Labor, Macroeconomic Measurement, Regulation • 324 Views    No Comments

As marijuana becomes increasingly legal, what kind of a market do we want?

At the moment, Colorado and Washington permit the production, sale and consumption of recreational marijuana and 18 states say the sale of marijuana for medical use is okay. But meanwhile, “federal law prohibits the cultivation, distribution and possession of marijuana.”

As a result, there are multiple marijuana markets in the United States. We even have marijuana arbitrageurs. Cheap in California and expensive in NY, the marijuana that is grown for medicinal use on the West coast can be sold in the East for a handsome profit.

Now, let’s take the next step. Assuming that marijuana becomes legal throughout the US, what needs to be resolved?

One concern is market structure and how to create monopolistic competition. With many sellers on the supply side and many buyers creating demand, monopolistic competition lets the market determine price and quantity. By contrast, if a less competitive oligopolistic market develops, several large firms would have disproportionate power. Targeting potentially heavy marijuana users, they could encourage excessive and unhealthy consumption.

A second issue is regulation. On the supply side, quality and safety need to be assured. Labeling needs to be accurate. For marijuana, we are not only talking about a smokable plant but also products like ice cream, candies, brownies and lozenges.

Finally, what about taxes? Colorado and Washington have been wrestling with the size of a sales tax. Too high and you could get a black market. Too low, and not enough revenue. Almost 2 weeks ago, the Colorado legislature approved an effective rate of 21.2%–more than the beer tax and less than cigarettes. Here are the specifics:

Colorado Marijuana Taxes (if approved by the governor and a popular vote)

Colorado Marijuana Taxes From Quartz (Taxes still have to be approved by governor and citizens)

Our bottom line? Because market structures create incentives for sellers and buyers, legislators can shape the impact of legalized marijuana.

Sources and Resources: The articles on marijuana markets are fascinating. The NY Times had this Op-Ed, Quartz focused on taxes (and the source of my cost data), this past econlife post links to some wonderful discussions, and here is a “Marijuana Arbitrage” podcast from NPR’s Planet Money. You might also want to see what the Congressional Research Service says about marijuana.

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