Question

Respond to the following questions: a) Describe the evolution of the marijuana industry (in Colorado); What are the conditions that now explain an oligopolistic industry structure? b) What are the “welfare” (as discussed in Mankiw) implications of this industry structure? c) What are the public policies toward this industry/market? In your opinion, are they appropriate or inappropriate? Are there other policies in relation to oligopolies that should be implemented?

Answer 1

Answer: -

Evolution of the marijuana industry in Colorado:

When Colorado became a state, in 1876, both hemp and cannabis were legal — and they stayed that way for decades. In March 1917, Colorado legislators made the use and cultivation of cannabis a misdemeanor. But in 1929, when the Colorado Legislature passed a law making the sale, possession and distribution of marijuana a felony in Colorado, minorities were clearly the focus of the measure. By the 1960s, The hippies had arrived. The newspapers were full of stories about hippies busted with marijuana plants in their backyard and columns that made it clear that their authors thought hippies deserved to rot in jail over possession of a plant.

The cannabis climate had clearly become more friendly by 1973, when legislator Michael Strange, a Carbondale Republican, introduced the first re-legalization effort in Colorado history. And in 1975, the Colorado Legislature followed suit, decriminalizing possession, transportation and private use of marijuana; possessing up to an ounce of the stuff was made a petty offense, with a maximum fine of $100. Colorado's first medical marijuana bill dubbed the "Dangerous Drugs Therapeutic Research Act," was introduced in 1979 and signed into law.

In 1996, California voters approved Proposition 215, allowing the use and cultivation (and sale, some argue) of medical marijuana. In 2012, Colorado voters passed Amendment 64, making it legal to grow, consume and sell cannabis. Colorado was one of the first states to legalize cannabis.

Oligopolistic industry structure:

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.”

There are multiple marijuana markets in the United States. They 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.

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.

Public policies:

The issue of regulation is important. 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.

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.

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