Tuesday, February 25, 2014
Policymakers want to ensure that the marijuana industry doesn’t engage in socially irresponsible behaviors, such as selling marijuana to minors. And many policymakers agree that the structure of the marijuana industry plays a key role in shaping its behavior. Interestingly, however, policymakers seem to disagree about whether society would be better off if the marijuana industry were concentrated (i.e., controlled by a few Big firms) or fragmented (i.e., controlled by many Small firms).
On one side, anti-legalization groups like Smart Approaches to Marijuana has raised the specter of Big Marijuana. The group doesn’t really explain why Big is necessarily bad; instead, it just conjures images of Big Tobacco to make its case. But there are reasons to be concerned about concentrated industries. All industries, of course, are driven by a profit motive and seek to expand their markets as much as possible. For this reason, industries generally oppose regulations that reduce the size of those markets, such as laws banning sales to minors, regardless of whether those laws make good sense for society as a whole. To be sure, this anti-regulation impulse can be found in both concentrated industries and fragmented ones. But all else being equal, concentrated industries are generally more successful at blocking passage of sensible regulations. In large part, this is because of the transaction costs and free-rider problems besetting fragmented industries. It is just a lot easier to coordinate the lobbying efforts of a few Big firms than it is to coordinate the lobbying efforts of many Small ones. Hence, if the marijuana industry were ever to be dominated by a few, very Big players, it might prevent governments from passing sensible restrictions on its activities, much the way Big Tobacco fought off government regulations for decades.
On the other side, government officials have raised the specter of Little Marijuana. Little Marijuana depicts the current structure of the industry. It is populated with hundreds – and in states that allow home cultivation, thousands -- of relatively small growers and distributors. While a fragmented industry wields less political clout, it is also far, far more difficult to police. It is a lot easier for government agents to monitor an industry comprised of a few Big firms than it is for them to monitor an industry comprised of many Small ones. Hence, as long as the marijuana industry remains highly fragmented, governments will likely have a difficult time enforcing sensible restrictions on its activities. Colorado’s Marijuana Enforcement Division, for example, has struggled to monitor the hundreds of medical marijuana dispensaries in the state, and state officials have complained that home cultivation exacerbates the problem.
For all of its vices, Big Tobacco helps demonstrate the upside of a highly concentrated industry structure. For example, as I discuss in more detail in this paper, there is relatively little evasion of cigarette taxes in this country, even though the taxes imposed on cigarettes can be quite high (e.g., 45% in federal and state excise taxes alone in California). For example, several studies estimated that only about 7-12% of cigarette taxes go unpaid on average. (Not surprisingly, the number is higher in high-tax jurisdictions.) In large part, the successful enforcement of cigarette taxes can be traced to the highly concentrated structure of the tobacco industry: three firms now manufacture roughly 85% of all cigarettes consumed in this country (and they do so at just 15 factories). I think it safe to say that monitoring this industry to ensure that taxes are paid (and other regulations followed) is far easier than it would be if thousands of firms were now manufacturing cigarettes.
Ultimately, perhaps the lesson is that Big Marijuana and Small Marijuana both pose challenges for policymakers, albeit challenges of a different nature. In the short term, Small Marijuana is clearly a bigger concern. But in the long term, policymakers long for the day when the industry wielded little political clout.