The Dangers of Poor Regulation on Burgeoning Cannabis Markets

Despite the aggressive, yet ambiguous, anti-cannabis positions of Jeff Sessions’ Justice Department, the ship towards full legalization has already sailed. Cannabis, both medical and recreational, will become an industry that meets — if not surpasses — all expectations as it becomes a part of polite society.

Currently, around 90% of Americans favor legalizing cannabis for medical use, while 61% support full legalization — up from 40% in 2011. Spend a mere five minutes on Twitter, and you’ll see everyone from hardcore hippies to members of the alt-right united in the fight to end the persecution of this plant. The real question, therefore, is how long we will have to wait to experience all the amazing benefits an unfettered cannabis industry brings with it, from jobs and tax income to a healthier and safer population in general. How many more lives and families will suffer from incarceration and lack of access to medicinal marijuana before the cannabis front in the “War on Drugs” finally comes to a close?

Poor regulation can grind the progress of access down to a halt. Poor regulation happens when states, having to build out their cannabis industry (sometimes reluctantly if it stems from a voter initiative), do so in an inefficient, market-mucking manner. We’ll get into some general examples of poor regulation and their effects in a bit, but first, let’s touch on how they happen in the first place.

What leads to poor regulation?

First, some legislators simply cannot get over the stigma, which affects not only conservatives but also some liberals who often don’t realize just how much the drug wars’ messaging has permeated their psyche. This often drives them towards overregulation, even if they live in a place where few constituents are concerned about it. There are still a few places where being anti-cannabis can help a lawmaker get elected. It’s still a natural choice for indifferent policymakers to take a harder stance on cannabis to pander to these voters, since many voters don’t view access as a critical issue, so even supportive lawmakers might be compelled to give ground to gain political capital for other matters. Lastly, there are those who have a more sinister reason for pushing out poor regulations — they know the explicit damages of doing so. At this key inflection point in the industry, poor regulation can have a much more dramatic and negative effect than if folks took the time to get the best policies figured out upfront, and then implemented them at the most opportune time in the future.

Let’s take a look at a few of these policies, and then how they can be used to damage the industry. Limits to products; for example, not allowing sales of flower and/or edibles. Poorly devised dosing limits/requirements, such as 10mg per packaged dose makes no sense for many long-term medical patients. Having more stringent thresholds than other comparable agricultural items. High local barriers to entry, like high license costs and requirements. Limits to workforce participation, such as preventing those with nonviolent criminal records from working in the industry.

Poorly devised canopy size limits (or lack thereof): too big or too small lead to suboptimal market outcomes. Poor zoning policies lead to geographically suboptimal development. Limits to medical conditions covered - Limits the total patient population that can be serviced (and keeps those suffering from conditions not included in limbo). Limiting access to banking makes operations more difficult, and significantly increases safety and security risks. Unfair tax policies make financially breaking even as an operator much harder, driving up industry costs. Price controls, a form of economic heavy-handedness, will likely backfire.

Consequences of poor regulation

If cannabis access is difficult due to eligibility requirements, geographic factors, or high price, folks will defer to the black market. Same if the marketplace is too limited in variety to cover market needs, such as restricting flower for “health” reasons. Inefficient policy leads to inefficient markets, which vastly decreases the industry’s capacity to create jobs. It also makes it harder to get into the hands of the patients who desperately need it — such as seizure disorder sufferers, veterans with PTSD, and opiate addicts. Societal benefits sacrificed by poor regulation include the reduction in fatal traffic accidents that comes with access and public healthcare costs due to fewer of these accidents, lower alcohol use and opiate abuse, and even a reduction in publicly subsidized prescriptions via Medicare and Medicaid.

Poor regulation can also leave a lot of tax money on the table, or worse yet, creates conditions where tax dollars flow out of one state and into one that has more lenient marijuana laws, like Colorado. This doesn’t even touch on the general health benefits that are starting to be confirmed with cannabis — particularly its capabilities as an anti-diabetic, anti-inflammatory, and anti-tumor agent.

Overly onerous regulations will drive folks to take shortcuts around other important regulations to meet all the demands placed on them. A good example is pesticide testing — overzealous and unnecessary testing standards drive folks to find ways around it, or simply to divert product to the black market. It squanders an opportunity to have robust, focused and targeted testing requirements which ensure patient safety and overall product quality, without overly burdening producers.

The cannabis industry is somewhat unique due to the legal ambiguity it is built on. A lot of folks made huge sacrifices and often suffered so that everyone could one day have access to this substance. Regulations need to respect and honor this fact. Burdensome regulations and high costs raise barriers to entry, decreasing the amount of competition and participants; also, poorly designed policies allow a well-capitalized company to come in and scale faster than its competition, pushing out smaller competitors.

A Plea for Rationality

If you are a state official tasked with implementing a cannabis policy in your state, rather than bringing in a bunch of cannabis consultants, bring in an economist! An economist can objectively examine what makes sense and what doesn’t by objectively reviewing the best practices in other markets. This fact-based analysis can help you to build a regulatory regime that maximizes benefits for as many stakeholders and patients as possible.