In many industries, including tobacco, a small number of companies control most of the business and in doing so attain sufficient economic power to shape regulatory decisions in their favor. A similar situation could easily arise if marijuana is fully legalized.

Regulatory capture by a legal Marijuana Mega-Corp is not considered problematic by most libertarians given their hostility to government and worship of corporate power. But it profoundly troubles at least three political camps (a) Good-government advocates who fear corruption of regulatory agencies, (b) Public health professionals, and, (c) The noble minority of libertarians wise enough to appreciate that large, weakly-regulated corporations can and frequently do violate the freedom of the citizenry. These public-minded groups can pursue at least two different policy strategies to keep any future legal marijuana industry from becoming a clone of Big Tobacco.

The Washington State Legalization Ballot Initiative 502 offers a strategy based on control of producer size. The Liquor Control Board has the power to issue a large number of licenses to legally produce marijuana while limiting how much each licensee can produce. The resultant cottage industry would be highly competitive and have a hard time coordinating regulatory capture efforts relative to an industry with only one or two mega-producers. On the downside, such an approach would raise the costs of inspecting all production sites and make monitoring compliance with any future regulations a more significant bureaucratic challenge.

Pat Oglesby has offered an intriguing alternative policy approach: Using tax rates to help small marijuana production firms compete with large ones, who economies of scale could otherwise allow them to undersell small producers. Federal alcohol taxation has this intent:

Small wine businesses, producing no more than 150,000 gallons a year, pay just 17 cents a gallon – instead of the standard Federal rate of $1.07 — on the first 100,000 gallons. Small and medium sized brewers, on the first 60,000 barrels, pay $7 a barrel instead of the standard $18.

As Pat notes himself, a sized-based tax rate requires the up-front work of creating clear standards and monitoring protocols to ensure that “small” producers are in fact small (versus for example being a mega-corp disguised as a series of small producers operating under different names). Still, as a public policy, it has the elegance of simplicity, which is often a facilitator of implementation within overstretched state bureaucracies.

[Cross-posted at The Reality-based Community]

Keith Humphreys

Keith Humphreys is a professor of psychiatry at Stanford University. He served as a senior policy advisor at the White House Office of National Drug Control Policy from 2009 to 2010.