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Bad economics of legalized pot

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POSTED May 9, 2017 1:19 a.m.

Editor, Manteca Bulletin,
There are some interesting facts that Dennis Wyatt revealed in his column (“California here we come: Drug cartels & Teamsters”, May 8, 2017) on legalized pot. The most interesting is that the price hasn’t come down. Shouldn’t we be asking why?
As Dennis points out, the state is supporting the price of pot to collect taxes. After all, why would they drive the price down if the illegal market set the price at $240 per ounce? That being the case, marijuana is not a free market product because as the state restricts entry into the market. It artificially lowers the supply which drives the price of the product up.
One could argue that that making pot legal will increase the demand for pot. It hasn’t proven to be the case in countries where the population has little respect for the written law and police have limited desire to enforce these prohibitive laws. Just like California, everybody who wanted pot could get it with limited risk so there is not a lot of pent up demand. Let’s give it a couple of percentage points of additional demand for experimental users anyway.
So, we have a restriction of supply and a slight increase in demand. The result is the price will go up.
Where else have we seen this behavior in the marketplace? The drug companies get patents that protect their discoveries for 20 years. The prices go sky high. Think the Epi-pen and the Hep-C drugs. Artificially restricting supply drives prices up…way up! Even farmers have been paid to not plant their fields to support prices. It always works!
Now let’s examine the wisdom of the decision to restrict supply. Drug cartels made a lot of money on two facts. First, it was illegal to grow or sell pot. This restricted entry into the business and restricted supply. Second, pot is cheap to grow so it is a high margin product with steady demand and plenty of profits to protect the business with guns.
What did you want when you voted to legalize pot? If your answer is a different drug cartel you are the big winner!
If you voted for legalized pot to take the crime out of the business and hence the cartels then you are the big loser. You are the big loser because as Dennis points out, there is too much profit in the business and the profit is supported with state sponsored artificial barriers to entry called licenses.
Should pot be run as a profit maximization business by the state? I would advise against it for the following reasons.
1.    Artificially high prices will keep organized crime involved as Dennis so adeptly points out in Monday’s editorial.
2.    Pot costs no more to grow than tobacco so why should a joint cost $5 when a cigarette cost 50 cents? There are a lot of collected taxes in a pack of cigarettes. The same is true with alcohol.
The state had no tax revenues from illegal sales of pot before so anything they get will be a positive contribution to the state coffers as long as they don’t match bureaucracy to the revenues.
3.    Creating more bureaucracy will eat up the profits without creating any net gain for the general population and government bureaucracy always grows.
4.    The state should never be a business because government can’t make reasonable business decisions when everyone has a finger in the pie. Business is not run on consensus.
The state could solve this problem by letting the tobacco and/or drug companies run the pot business and taxing them. It would be professionally managed and there would be no additional state bureaucracy. Supply would meet demand, prices would drop and drive artificially high profits out of the pot business. Imagine if pot made only 20% margins like most really good businesses. Without the artificially high profits there is no reason for the drug cartels to exist because pot would cease to be a low risk/high reward business. All the state has to do is regulate pot like alcohol, tobacco and firearms and use the existing infrastructure. While Dennis believes, I might be “delusional” in thinking that legalizing pot would make drug cartels a thing of the past, I can only agree with that assessment if the government continues to run the pot business. If it does then Dennis is right because the government will make bad economics of a perfectly sound business.

Mark Laurora
Manteca

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