In 2012, both Colorado and Washington citizens passed ballot measures allowing t

Question

In 2012, both Colorado and Washington citizens passed ballot measures allowing the production, sale and use of marijuana for recreational purposes. In both cases, the ballot measure authorized the legislatures to develop regulatory regimes, and to impose taxes to pay for the regulation. (Note: in Colorado, those taxes had to be approved by a vote of the people, and they were, in 2013.)

Use the microeconomic theory we have been studying to analyze the legal and illegal markets for marijuana in Colorado or Washington, specifically with regard to the following issues:

Will the legal market survive or thrive if the taxes cause prices to be higher than the blackmarket? In other words, is demand in the legal market price elastic, or price inelastic. Use elasticity theory to explain your determination. Remember, the law of demand says that when price rises, quantity demanded falls. Elasticity helps us to answer the next question, "how much."

In what market structure will the retail establishments operate (perfect competition, monopoly, monopolistic competition, oligopoly). Explain. To address this question, your will need to know a bit about the regulations that have been passed. The local newspapers (in Colorado, the Denver Post) have provided good coverage of the issue, both before the 2012 vote, and during the process of crafting the regulations. In Colorado, an election guide, called the Blue Book, also provided some good analysis of the tax measure. It can be found on the web site of the Colorado General Assembly.

Explanation / Answer

Key features

Both states legalized marijuana possession for personal use by adults ages 21 and older. Colorado, but not Washington, also legalized production for personal use (though Washington residents with medical recommendations may also grow their own marijuana). Both states will create systems of legal production and sale, subject to licensing, regulation and taxation. For those younger than 21, all aspects of marijuana use, possession and sale will remain illegal.

Regulations

Washington’s Initiative 502 requires rules to be in place by December 1, 2013. The current timeline calls for the state’s Liquor Control Board to publish draft regulations in mid-June, begin to accept and review license applications in August, and begin to issue licenses by December 1.

Colorado’s Amendment 64 requires the state’s Department of Revenue to adopt all necessary regulations by July 1, 2013, and to begin accepting and processing license applications on October 1, 2013. Current plans call for commercial retail sales by early 2014.

Washington and Colorado took identical approaches to possession and age limits: adults 21 and older can possess up to one ounce at any time, normally a misdemeanor charge. The states also appear likely to adopt the same DUI policy, restricting driving with blood THC concentrations higher than 5 monograms per milliliter (ng/mL). The Colorado laws are more liberal in that they allow unlicensed production for personal use (up to three maturing plants at a time) and non-commercial transactions up to one ounce.

The states’ laws share similar taxation structures, with modestly heavier taxes in Washington. Washington levies between two and three 25 percent excise taxes within the supply chain, depending on industry structure, yielding a total tax burden likely somewhere between 30 and 40 percent, plus sales tax. Colorado has enacted a 15 percent excise tax on unprocessed product and a 10 percent sales tax, for an approximate effective tax rate between 15 and 25 percent. The precise effective tax rates will vary based on the price of unprocessed marijuana relative to the total retail price, and with varying local sales taxes.

The laws impose different industry structures and build on their existing medical systems in different ways. In Washington, vertical integration across production and sale (i.e., a single entity producing and selling) is forbidden, and thus far no special allowances to current medical marijuana operators have been announced. In Colorado, the new legal structure is more consistent with its existing, vertically integrated medical market. Vertical integration will be required for commercial marijuana industries in Colorado until October 2014, when stand-alone producers and retailers will be allowed. Pre-existing medical marijuana operators in Colorado will also be given exclusive rights to licenses for the first three months.

The Administration has yet to announce a clear policy on the new laws. President Obama, in a December 2012 TV interview with Barbara Walters, acknowledged that the voters of Washington and Colorado had spoken on the issue, that it “does not make sense” for federal enforcement to prioritize recreational drug users in states where use is legal under state law, and that there is a need for “a conversation” about reconciling state and federal law. At the same time, he pointed out that the federal law remains in effect and that the executive branch has the responsibility to enforce the laws.

The Department of Justice (including the Drug Enforcement Administration) has made it clear that the provisions of the CSA covering marijuana remain in force, with Attorney General Eric Holder expressing particular concern about the potential effects of the new state laws on marijuana use by minors. The Director of the Office of National Drug Control Policy (ONDCP) has expressed continued opposition to marijuana legalization. Negotiations are reportedly taking place between federal officials and Colorado and Washington state officials.

During a March 2013 Senate Judiciary Committee oversight hearing, Attorney General Holder, in response to Senator Patrick Leahy’s questions about the new state laws, promised to announce a formal policy toward state marijuana legalization “relatively soon.”

The prospect of federal intervention to override the new state laws appears to be widely unpopular. A USA Today/Gallup poll conducted after the November 2012 elections found that 63 percent of Americans opposed federal intervention in states that legalized marijuana.

Reflecting changing opinions regarding marijuana legalization, Pew’s March 2013 survey found that 72 percent of Americans believe that government efforts to enforce current marijuana laws cost more than they are worth. Consistent with the USA Today/Gallup poll, Pew also found that 60 percent of Americans oppose federal enforcement in states that have chosen to legalize, including 64 percent of Independents, 59 percent of Democrats, and 57 percent of Republicans.

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