The US Drug Enforcement Administration has taken steps to reclassify marijuanamaking it a sort of legal but regulated medicine, like Tylenol with Codeine or some Steroids.
With the reclassification 26 states where cannabis is currently illegal must determine whether or not they need to take motion to stop the sale of cannabis of their state or work out find out how to regulate the recently legalized drug.
In some states, similar to North Carolina, there are laws that state that cannabis automatically grow to be legal as soon because the nationwide change comes into force.
But cannabis regulation is nothing latest in Colorado and Washington. These two states have greater than a decade of experience drafting and enforcing laws to manage the marijuana market.
I’m an economist who focuses on predicting the impact of varied regulations on industries similar to legal recreational marijuana, alcohol, and tobacco. Let's take a look at how Colorado and Washington have tackled the issue – and what other states can learn from their experiences.
Early adopters
In 2012Colorado and Washington were the primary two states to Legalize marijuanabut their regulatory approaches were different.
Colorado has introduced more competition-friendly laws by allowing an infinite variety of marijuana retailers. Markets with many firms Economists generally imagine that they’re higher for consumers because they lower prices and increase the standard of products and services offered.
Washington took a distinct approach by limiting the number of outlets and restricting competition. This approach aimed to maintain higher prices To Prevent overconsumptionToo much cannabis consumption can result in Burdens on societysimilar to increased health costs and negative effects on young peoplesubsequently, legislators could have been motivated to curb it.
At first glance, one would expect Colorado's laws to end in significantly lower marijuana retail prices. But in 2022 average marijuana prices were actually barely higher in Colorado than in Washington. Regulations in each state have modified little since 2012. So why hasn't Colorado's freer market led to lower prices, as an economist would expect?
Limited versus unlimited retail licenses
I imagine the reason lies in three key areas where the 2 states' policies diverge: the cap on the entire variety of licenses issued by each state, the dimensions of an organization, and vertical integration. In the case of marijuana sales, vertical integration implies that the identical company can own farms, distribution firms, and retailers.
When Colorado first legalized marijuana for recreational use, it allowed Unlimited cannabis licenses for producers, wholesalers and retailers. This promoted an environment of intense competition.
In contrast to Limitation of retail licenses to 334or 4.8 pharmacies per 100,000 people, creating the conditions for a concentrated market that might potentially result in higher markups and retail prices. In 2016, Washington increased this limit to 556 medical pharmacies. From March 2024 only 469 of those licenses were used.
In comparison Colorado has 680 retail licensesThat's about 14 distribution points per 100,000 people, about thrice as many per capita as in Washington.
Based on the variety of retail licenses alone, the marijuana industry appears to be more competitive in Colorado than in Washington, however the second policy difference – the dimensions of the businesses – complicates this picture.
Helen H. Richardson/The Denver Post via Getty Images
A David versus Goliath market
In Washington, the variety of marijuana licenses per business is regulated, making the market more attractive to many small businesses. In Colorado, then again, the regulatory environment is friendlier to large chains.
Washington will allow any recreational marijuana business to own only five outpatient clinics, three breeders And three processorsA processor converts raw materials into usable products and sells them to pharmacies or other processors.
Average, A marijuana company in Washington owns 1.24 licensesThis is in stark contrast to Colorado, where on average an organization owns 9.6.
The marijuana market in Washington has not yet attracted large marijuana firms. In Colorado, nonetheless, the situation may be very different.
For example, the marijuana chain company LivWell currently has 24 lively retail licenses for recreational marijuana in 14 cities in Colorado. The company also has two cultivation sites in Denver.
Large marijuana chains like LivWell And Local roots are widespread in Colorado, however the regulatory environment makes it difficult for small independent producers and dispensaries to survive. Although Colorado provides seven times more licenses than Washington for firms to grow, distribute and sell marijuana, They belong to far fewer firmsThis leads to a less competitive marijuana market with higher prices.
State differences in vertical integration
Finally, each states different restrictions on what economists call vertical integration.
To understand vertical integration, think concerning the cell phone industry. Apple and Samsung are vertically integrated firms, meaning they manufacture, distribute, and sell their products in their very own stores.
In comparison, breweries are subject to a very different regulatory environment. Anheuser BuschThe company that brews Budweiser shouldn’t be allowed by law to distribute the beer or sell it on to consumers. Instead, it must the three-tier system that controls the alcohol industry, meaning it will possibly only sell to wholesalers. Many municipalities make an exception for craft breweries, which might sell on to consumers with some restrictions.
If vertical integration is allowed within the marijuana industry, growers may even be allowed to be processors and operate marijuana dispensaries. Colorado's original laws went a step further by actually allowing all Marijuana retailers to be vertically integrated in the primary nine months of their business. This meant that every one licensed retailers needed to grow no less than 70% of the marijuana they sold.
The The motivation for this was to stop Black market marijuana cannot enter the state's legal market. If a dispensary sells its own marijuana, it will possibly now not receive shipments from the black market.
Colorado has abandoned the requirement of vertical integration in 2018. Now firms can grow and sell to any retailer, but most remain vertically integrated.
In contrast, strict prohibits vertical integrationby applying a three-tier system like that for the alcohol industry. This ensures that the marijuana industry is strictly regulated.
Vertical integration most frequently results in lower prices. Without vertical integration, the supplier charges a markup when it sells its products to a retailer, and the retailer charges its own markup when it sells its products to the patron. In contrast, vertically integrated firms charge a markup on the product just once, saving the patron money.
But vertical integration can sometimes drive up prices since it makes it harder for small, independent firms to compete. This lack of competition results in greater market concentration and subsequently higher prices. In Colorado, the existence of many vertically integrated firms immediately after legalization likely gave only just a few large players a bonus.
What the legislator can do
Prices are influenced by a posh interplay of competition, market concentration and vertical integration. So what can legislators do?
States that need to lower marijuana prices should encourage competition by issuing more licenses, limiting company size, and allowing vertical integration.
Countries looking for to limit consumption through higher prices could limit licenses, impose no restrictions on company size, and prohibit vertical integration to create a more controlled market with fewer firms.
image credit : theconversation.com