Three Economic Models for Legalization

Three Models

The nation of Uruguay legalized marijuana around the same time that Colorado and Washington State did, but the picture there is much different. The laws call for a state-run marketplace, and Uruguay’s government has set the price at about $1 per gram.

This is socialized cannabis, and it is widely understood as a move to eviscerate the cartels. Is there something here for investors in the United States?  Nothing is immediately obvious, though some companies, including Plandaí Biotechnology have set up growing and testing facilities there.

The big picture, however, is that there is more than one way to organize this new industry. The creation phase of any big enterprise is the time to take on big questions. What happens now, next week or next month is likely to take permanent shape. The choices are important because each economic model supports different societal goals.

Although it hardly exhausts the alternatives, it is worth examining the upsides and downsides of three possible choices:

  • the Uruguayan model,
  • the grow-and-share model and
  • the tax-and-regulate-like-alcohol model, supported by the Marijuana Policy Project.


A State-Run Industry

Uruguay is the most progressive country in Latin America, where drug consumption has never been illegal but where legal sale is also not widely popular. With no history of prohibition, marijuana is a shoulder-shrug issue. Legalization is essentially a footnote in a history that has included a military dictatorship and the so-called “dirty war” in which thousands of South Americans disappeared.

Under the recently enacted law, individuals may grow as many as six plants at home or join a growing cooperative with as many as 45 individuals. Beginning in March, pharmacies may also sell state-controlled marijuana to registered consumers. The goal, as described by former president Jose Mujica, is purely and simply to put the cartels out of business.

Until legalization in Colorado and Washington, marijuana was also, at least theoretically, a state-run industry in the U.S., with the only legal growing facility run by the Drug Enforcement Agency. The goal was clearly prohibition, which makes it hard to learn much except perhaps that unilateral control makes prohibition possible.

More relevant, perhaps, are the state-run liquor stores that exist through more than a third of the U.S. Although the initial motive may have been to eliminate the profit motive from alcohol sales, (during the Temperance era, alcohol was also sold only at “dispensaries”) the reason for the continuation of state control may be the revenues that alcohol sales generate.

In any event, both the strength and weakness of state control may be the single-mindedness with which a stated goal may be pursued. It is strong, if not flexible.



Washington, D.C., is now in an odd netherworld where recreational marijuana appears to be legal to have, use and grow, within limits, but not to buy or sell. Presuming that this is an enforceable system, what does it leave? Open-hearted gifts and barter?

Mark Kleiman has suggested that the give-and-grow model may be a way to prevent over consumption, although it is not entirely clear how a product that is both cheap and unregulated would support sensible use. Alternatively, he proposes that production and sale be restricted to consumer-owned cooperatives, not-for-profit enterprises, or to stockholder-owned public-benefit corporations whose chartered purposes would include the promotion of moderate consumption and whose boards would include experts in public health, pediatrics, and drug abuse prevention. Under this model, marijuana regulation would become the business of private non-profit organizations, much as care for the poor has been shifted from government to churches.

What could possibly be wrong with this?

  • It is not clear that the non-profit world is either up for this challenge or disinterested.
  • An economic model that excludes the exchange of currency is really not an economic model. It is an invitation to illegal trade.
  • Depending on public preaching to discourage intoxication also looks like a lightweight version of “Just say no.”

This is an abdication of public responsibility. It leaves the door open to bad actors.


Tax and Regulate Like Alcohol

This is the model for much state legislation. It avoids the risks of unilateral control; it preserves the profit motive and opportunities for investment. As an article of capitalist faith, it should also drive price down and quality up.

It is also a flawed theory, as many have pointed out. Whether it eliminates the black market depends on price point, which depends on tax policy, among other things. There is also no particular reason to suppose that legalized commerce will encourage moderation, even if tax revenues are directed toward drug education and rehabilitation. There is the risk of monopoly power, as those who worry about the history of Big Tobacco, Big Alcohol and Big Pharma are quick to point out.

To put this in perspective, it is worth touching base with the Cole memorandum, here. This Department of Justice directive sets out eight law enforcement priorities with respect to marijuana. The memo is more than a “hands off” message to law enforcement, though. It is a pretty good, if incomplete, attempt to describe societal priorities—protecting minors, preserving public land and fighting organized crime. The point here, though, is that there are eight of them. Investors and businesspeople can add a few more. Making money is not a bad thing.


Eight, Twelve, Fourteen

That is the strength of the tax-and-regulate model. Both state control and what might be described as the love-peace-and-happiness model have their charms, but for the long run, a relatively uniform system of taxing and regulating the recreational marijuana industry seems like the alternative that combines power and flexibility. Ten years from now we’ll know.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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