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Arizona’s legal cannabis industry opened this week. They have designed their market with a combination of very few retail stores and low taxes. This regulatory structure seems uniquely designed to provide windfall gains to owners of retail licenses (1/5) https://www.pbs.org/newshour/economy/arizona-launches-legal-marijuana-sales-with-dozens-of-licenses-for-dispensaries
This comes at the expense of both consumers and new state tax revenue (which was supposed to fund the state’s very underfunded school system.) Few stores mean very high market power for retailers, and thus monopoly-level prices. (2/5)
In principle this market power can benefit the state government by increasing revenue, as @chanman_econ and I show in our research on how excise taxes interact with market power ( https://ssrn.com/abstract=3237729) (3/5)
But this requires the willingness to set the tax rate at a high level. AZ is leaving billions on the table by setting the tax rate so much lower than other states like Washington. If they chose this because they care about consumers, they should have licensed more firms to enter
It seems instead they are essentially trying to maximize profits for the lucky few firms who own licenses. I hope that other large states that are currently writing their regulations do not make the same mistakes (looking at you, New York and New Jersey.) (5/5)
Addendum: As residents of Pennsylvania, Connecticut and others will tell you, these policy choices are very sticky over time. 1930’s alcohol regulations are still around today. We have one chance to design smart market rules for cannabis and I hope more states can get it right.
