Marijuana Taxation and Imperfect Competition

We investigate the tax implications of the new recreational marijuana industry in the United States, which reached $9 billion in 2017. We exploit administrative data from Washington State to evaluate market conduct, and we estimate the elasticity of supply to be 1.46. In addition, we conduct a survey of marijuana producers and retailers in Colorado, Oregon, and Washington, calculating the elasticity of demand to be -1.84. We use these estimates to determine how much of the tax burden is borne by consumers. The answer depends on market conduct. In perfectly competitive markets, producers pay slightly more of the tax than consumers, but, in a monopoly market, consumers would pay most of the tax. Additionally, we calculate that the change in deadweight loss due to the tax is $63 million per year, or 48 percent of total marijuana tax revenues in 2015. This calculation, however, depends critically on estimates of consumption externalities.