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Taxation and market power in the legal marijuana industry

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  • Brett Hollenbeck
  • Kosuke Uetake

Abstract

We study tax and regulatory policy in the legal marijuana market using unique administrative data from Washington state. Washington's retail entry restrictions have resulted in firms with substantial market power who behave like local monopolists. We show how the presence of market power causes tax and regulatory policy recommendations to differ from standard models that assume perfect competition. Combining structural demand models with measured pass‐through, we show that marijuana is not overtaxed at 37% but is still on the upward sloping region of the Laffer curve and that these taxes have high social costs and are mainly borne by consumers.

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  • Brett Hollenbeck & Kosuke Uetake, 2021. "Taxation and market power in the legal marijuana industry," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 559-595, September.
    • Handle: RePEc:bla:randje:v:52:y:2021:i:3:p:559-595
    DOI: 10.1111/1756-2171.12384
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    Cited by:

    1. Alali, Walid Y & Ellalee, Haider, 2022. "A Welfare and Pass-Through Effects of Regulations within Imperfect Competition," EconStor Preprints 268756, ZBW - Leibniz Information Centre for Economics.
    2. Justin Tyndall, 2021. "Getting High and Low Prices: Marijuana Dispensaries and Home Values," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(4), pages 1093-1119, December.
    3. Hollenbeck, Brett & Giroldo, Renato, 2020. "Winning Big: Scale and Success in Retail Entrepreneurship," MPRA Paper 100766, University Library of Munich, Germany.
    4. Keaton Miller & Boyoung Seo, 2021. "The Effect of Cannabis Legalization on Substance Demand and Tax Revenues," National Tax Journal, University of Chicago Press, vol. 74(1), pages 107-145.
    5. Ellalee, Haider & Alali, Walid Y., 2022. "A Welfare and Pass-Through Effects of Regulations within Imperfect Competition," MPRA Paper 116512, University Library of Munich, Germany.
    6. Benjamin Hansen & Keaton Miller & Boyoung Seo & Caroline Weber, 2020. "Taxing the Potency of Sin Goods: Evidence from Recreational Cannabis and Liquor Markets," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(2), pages 511-544, June.
    7. Xiuming Dong & Justin Tyndall, 2021. "The Impact of Recreational Marijuana Dispensaries on Crime: Evidence from a Lottery Experiment," Working Papers 2021-1, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    8. Adachi, Takanori & Fabinger, Michal, 2022. "Pass-through, welfare, and incidence under imperfect competition," Journal of Public Economics, Elsevier, vol. 211(C).
    9. Ken Yahagi, 2022. "Regulation on coexisting legal and illegal markets with quality differentiation," European Journal of Law and Economics, Springer, vol. 53(2), pages 235-259, April.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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