Question

In the Marijuana Industry, what will be the productive efficiency product amont? Draw and explain why?

Answer 1

Economies of scale are used to describe decreasing average cost of production or cost of producing a pound of marijuana as a grower total output increases. It is realized if there are diminishing marginal costs or if there are fixed costs of production refers to capital and plant construction are spread over a large scale of output.

Marijuana growers benefit from external economies of scale in which increase in the output produces marginal costs savings for entire industry. This would result when growers benefit from being close to other growers which may take the form of labor pooling, sharing common assets etc. An important external effect might be shared enforcement risk.

If economies of scale are present, estimating the magnitude of scale effect is important for informing decisions regarding the optimal number of license to issue. If economies of scale are large and persistent then growers who are producing at large scale would eliminate small-scale farmers from successive competing. Economies of scale have restrictions on the number of growers that are feasible in an unregulated market.

Large economies of scale favor large growers, oligopoly market structure and concentrated production.

Assuming a kinked demand curve where before the kink, demand is price elastic where if one firm increases price others do not follow suits whereas after the kinked demand becomes price inelastic i.e. when one firm increases price others follow suit. Now allocative and productive efficiency will not be realized because the price will exceed marginal costs and output will be less than minimum average cost level.