Legalizing MJ is Hard Regulating Pot is Harder

Jul 1, 2013

It’s not every day that a for­mer Microsoft exec­u­tive holds a press con­fer­ence to announce his new ven­ture into the excit­ing and prof­itable world of drug deal­ing. But that’s exactly what hap­pened ear­lier this month when Jamen Shiv­ely, a for­mer Microsoft cor­po­rate strat­egy man­ager, announced that he wants to cre­ate the equiv­a­lent of Star­bucks in the newly legal­ized pot indus­try in Wash­ing­ton state. All this is hap­pen­ing at the same time that the Wash­ing­ton State Liquor Con­trol Board is look­ing to final­ize rules on the new, legal mar­i­juana indus­try. And one of the major debates right now among board mem­bers is how much they ought to pre­vent or encour­age the kind of mar­ket con­sol­i­da­tion in which a few firms dom­i­nate the whole indus­try. As Chris Marr of the Liquor Con­trol Board argued, “How do you pre­vent a Microsoft mil­lion­aire from get­ting this idea and decid­ing that — play­ing by the rules — they’re going to dom­i­nate the mar­ket?” And if that is the con­cern, what can eco­nom­ics inform us about how this new mar­ket should be set up? To pro­vide some back­ground, vot­ers in Wash­ing­ton state passed Ini­tia­tive 502 last fall in a gen­eral bal­lot, cre­at­ing a statewide legal mar­ket in pot. Unlike Col­orado, which has passed a bill to expand its med­ical mar­i­juana indus­try and make pot legally avail­able to every­one, Wash­ing­ton is fold­ing pot under reg­u­la­tions for the liquor indus­try. As such, the Wash­ing­ton Liquor Board has reg­u­la­tory con­trol over the new mar­i­juana indus­try. As with alco­hol, a mar­i­juana firm is clas­si­fied as a pro­ducer, proces­sor or retailer. The first ques­tion, there­fore, is how aggres­sively reg­u­la­tors should try to check the mar­ket power of front-line sell­ers. As of now, if there is excess demand for licenses, which cost $1,000 each, they will be sub­ject to lot­tery. Licenses can’t be traded in a sec­ondary mar­ket, and it is pos­si­ble that the reg­u­la­tors will cap the num­ber of licenses per holder. The law also requires reg­u­la­tion for pub­lic safety and pub­lic health. As with the tobacco indus­try, vot­ers don’t want firms mar­ket­ing and sell­ing pot to under­age users. And pub­lic health offi­cials are con­cerned about com­pa­nies mar­ket­ing to “prob­lem users” who would like to quit or reduce their usage but find them­selves unable to. If that’s the case, then per­haps hav­ing pot deal­ers with large mar­ket power is a good idea. Econ­o­mists usu­ally con­sider monop­o­lists a prob­lem because they pro­duce too lit­tle of a prod­uct and charge too much for it, earn­ing sub­stan­tial prof­its. But that could be a good thing for the pot indus­try. Safe profit mar­gins mean that a firm might be less likely to com­pete on price for every poten­tial con­sumer — and also much more likely to fol­low the law. Yet peo­ple involved with the Wash­ing­ton law have two main responses to this. The first is that firms with mar­ket power could go out­side the mar­ket and use their exten­sive prof­its and influ­ence to exert polit­i­cal power. “The idea is to pre­vent the retail indus­try from becom­ing so large that they have enough wealth and power to roll over any­one try­ing to enforce, expand or update the public-health-focused rules that are designed to pro­tect the public’s health and safety,” says Roger Roff­man, a Uni­ver­sity of Wash­ing­ton pro­fes­sor and author of the forth­com­ing book “Mar­i­juana Nation.” Sec­ond, con­sol­i­dated firms may that they them­selves pose threats to pub­lic health. “If a firm has mar­ket power, the prof­its they get from sell­ing above mar­ket costs means that they can have a big­ger mar­ket­ing depart­ment,” says UCLA pub­lic pol­icy pro­fes­sor Mark Kleiman. “In the real world, spend­ing here will increase their mar­ket share by cre­at­ing addi­tional prob­lem users. This, com­bined with lob­by­ing efforts that will rival the alco­hol indus­try in terms of avoid­ing taxes and adjust­ing the rules, is a major prob­lem.” A third argu­ment comes from Uni­ver­sity of Chicago eco­nom­ics pro­fes­sor E. Glen Weyl. He argues that “long-term play­ers who have mar­ket power have an incen­tive to get peo­ple addicted. A monop­o­list, in par­tic­u­lar, has a big incen­tive to adver­tise to get peo­ple addicted over the long-term, as they are sure to reap all those rewards.” If a mar­i­juana firm has a monop­oly, then the finan­cial gains of turn­ing some­one into a heavy, prob­lem user of a prod­uct (rather than a spe­cific brand) will all go to that firm. A mar­ket with smaller, frag­mented firms with greater turnover would be a check on this dynamic. Both Weyl and Kleiman argue that Wash­ing­ton should con­sider bolder ideas to reg­u­late the indus­try. Weyl sug­gests some sort of manda­tory turnover pol­icy to dis­cour­age firms from turn­ing peo­ple into prob­lem users. Another pos­si­bil­ity, which Kleiman con­sid­ers, is to cre­ate a state-run non­profit retail firm that has no inter­est in cre­at­ing prob­lem users or expand­ing the mar­ket. (Given that pot is still ille­gal at the fed­eral level, this isn’t likely to hap­pen). Mar­ket con­sol­i­da­tion is also an issue when it comes to a firm’s ver­ti­cal struc­ture. Under Wash­ing­ton state law, if a firm is a retailer, it can’t be a pro­ducer as well as a proces­sor. This is meant to frag­ment the ver­ti­cal chain of pro­duc­tion, and it con­trasts with Colorado’s sys­tem, in which deal­ers are required to grow 70 per­cent of what they sell (as that is how the med­ical mar­i­juana sys­tem works). Another related eco­nomic issue is the loca­tion of pot retail­ers. The law in Wash­ing­ton, as cur­rently struc­tured, requires pot retail­ers to be at least 1,000 feet away from a school, day-care facil­ity, play­ground, teen arcade game cen­ter, recre­ation cen­ter, tran­sit cen­ter or library. Though this may sound minor, in prac­tice it means that it will be very dif­fi­cult to put pot retail­ers in dense pop­u­la­tion spaces. Retail­ers might be lim­ited to indus­trial or largely depop­u­lated areas. That could force what econ­o­mists who study spa­tial mod­els of economies call the agglom­er­a­tion model — as when cer­tain kinds of restau­rants all clus­ter together to cre­ate an area peo­ple go to for cer­tain goods. As Weyl notes, “often eth­nic restau­rants clus­ter into neigh­bor­hoods so that peo­ple can find the best places, cre­at­ing eth­nic neigh­bor­hoods. Do we want a ‘pot town’ to grow up in our cities? Per­haps not, but that is the log­i­cal con­se­quence of forc­ing deal­ers away from a con­ve­nience model.” Kleiman thinks the main issue with regard to pot retail­ers’ ulti­mate loca­tion has more to do with adver­tis­ing and dis­cre­tion than any­thing else. “An alco­holic try­ing to quit drink­ing will pass by alco­hol in bars, bill­boards and gro­cery stores. That per­son uses up a lot of emo­tional energy always hav­ing to say no.” Instead of focus­ing on 1,000 feet within cer­tain build­ings, the big­ger issue Kleiman empha­sizes is whether store­fronts and signs aggres­sively adver­tise their prod­uct. It’s impor­tant to get these issues right because they inter­act with the three back­ground con­straints on this new mar­ket. The first is the black mar­ket, while the sec­ond is the legal med­ical mar­i­juana mar­ket. For some rea­son, the med­ical mar­i­juana mar­ket won’t be taxed, while the new legal mar­ket will be taxed around 25 per­cent. (The black mar­ket is, of course, not taxed at all.) Note that if the price goes too high, or if the loca­tion restric­tions prove too incon­ve­nient, pot con­sumers might just stick with med­ical mar­i­juana or the black mar­ket. State law­mak­ers are cur­rently try­ing to get the med­ical mar­i­juana mar­ket folded under the same reg­u­la­tions that the Liquor Board is cre­at­ing for the legal pot mar­ket, and Mark Kleiman notes that police may need to esca­late crack­downs on ille­gal dis­tri­b­u­tion as they legal­ize the mar­ket. A third con­straint is the fed­eral gov­ern­ment, which enforces laws that still make pot ille­gal. If legal­iza­tion is seen as a dis­as­ter, it is pos­si­ble that the fed­eral gov­ern­ment will move to shut down the process by pre­empt­ing state law. But even if it doesn’t, back­ground laws will prob­a­bly hurt the scale and effi­ciency of pot retail­ers. As Jack Fin­law explains, since mar­i­juana is banned at the fed­eral level, new pot retail­ers “often can­not con­duct their busi­nesses through banks. They also can­not deduct busi­ness expenses from their fed­eral taxes.” It is pos­si­ble the nor­mal inter­ac­tions between busi­nesses that allow them to thrive — things like hav­ing a legal bank account — won’t be imme­di­ately avail­able. Mar­kets are con­structed through laws and reg­u­la­tions, and the mar­ket for pot that is being cre­ated in Wash­ing­ton state is no excep­tion. The reg­u­la­tors see how the con­sol­i­dated alco­hol indus­try is able to avoid tax­a­tion and account­abil­ity and are deter­mined to avoid these prob­lems in the new pot indus­try. Thus this mar­ket may help econ­o­mists under­stand a cru­cial role of reg­u­la­tions that has lapsed in recent decades: the role of gov­ern­ment in curb­ing the excess power of the pri­vate sec­tor. Mike Kon­czal is a fel­low at the Roo­sevelt Insti­tute, where he focuses on finan­cial reg­u­la­tion, inequal­ity and unem­ploy­ment. He writes a weekly col­umn for Wonkblog. Source: Wash­ing­ton Post (DC) Author: Mike Kon­czal Pub­lished: June 29, 2013 Copy­right: 2013 Wash­ing­ton Post Com­pany Con­tact: letters@​washpost.​com Web­site: http://​www​.wash​ing​ton​post​.com/

857d6ccc67ijuana.jpg 150x112 Legalizing MJ is Hard Regulating Pot is Harder

Orig­i­nal post:
Legal­iz­ing MJ is Hard Reg­u­lat­ing Pot is Harder

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