Eric Crampton on the economics of Cannabis

Ballot Measures

Eric Crampton has written an article for NBR on the economics of cannabis.

Business Insider has a great write-up on Colorado’s legalised marijuana markets. Currently restricted to medical marijuana sold through dispensaries, recreational use without prescription will be legal and anyone will be able to purchase from the dispensaries. They’re expecting to raise $130m in taxes, although the tax mechanism is rather opaque. IRS won’t let you take business deductions on things it deems illegal, even if the State is cool with it.

I read the story through an Austrian entrepreneurial-discovery lens. We always have a path to some new equilibrium rather than simple blackboard comparative statics. Business Insider details the mistakes made along the way. Because the regulations effectively required vertical integration of dispensaries with growers, businesses needed a combination of a business-type to provide financing and run retail, and a former basement grower who knew how to grow. 

Crampton himself has had a go at estimating excise taxes from cannabis for NZ.

I also love that the story provides us with some benchmark market prices for lower and higher grade product: retail price of $25 to $50 per quarter ounce. Now this is still in a not-quite-free market: the growers have to be vertically integrated with the dispensaries, so this limits the economies of scale that could obtain in a fully legal market. But it suggests that USD $100-$200/oz would be a ballpark price to consumers.

I’d guessed NZD$100/ounce as baseline costs in a legal NZ market. If Colorado’s cost structure approximates that which would here obtain and we reckoned NZ prices of NZD$100-200,* and if excise were set to keep selling price to consumers constant at $300/oz, then we’d be setting excise and GST revenues at about $150/oz rather than the $200/oz I had expected. So excise would be closer to $125 million than to the $167 million I’d expected. That back of the envelope reckoning wasn’t far from this one though.

That should help balanc the books quicker…167 million reasons to legalise cannabis.

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