Massachusetts’ Addiction to Regulation Keeps Most Pot Sales on the Black Market

By Max Gulker

Since Massachusetts residents passed a 2016 referendum legalizing recreational cannabis, the fate of the industry has largely been in the hands of the state’s Cannabis Control Commission. Having licensed 23 pot stores across the state, and set rules for individual growers, the commission is now drafting rules for marijuana delivery services.

You may be chuckling right now at the possibility of a stereotypical stoner’s dream to never leave his home coming true, or because Massachusetts, never coy about heavy-handed regulations, has created something called the Cannabis Control Commission. Take a moment to get those laughs out of your system, because we can learn a lot about government regulation from Massachusetts’ early experiences with legal pot, and what we learn is no laughing matter.

Everybody Must Get Filmed

The current flashpoint involves draft rules proposed by the commission that would require all delivery drivers to wear body cams that record transactions in customers’ homes. Footage would be retained for 90 days, during which time law enforcement would be welcome to use it should any investigation come up. The draft rules also mandate two licensed professionals in each delivery vehicle at all times and expensive GPS equipment.

The commission says it’s trying to prevent legal pot from entering the black market as well as theft and consumption by minors. Laudable goals indeed, but the commission’s ideas represent regulatory overreach approaching the point of parody.

Our first instinct may be to view the proposed rules either as nanny-state micromanaging or political pandering to those still not on board with the idea of legalization. But we can best understand the delivery rules currently on the table through economics.

Public choice theory teaches us that governments are large organizations with politicians and bureaucrats who respond to their own incentives, just like any organization. The theory is often reviled by the Left, and occasionally celebrated by libertarians, based on a caricatured version that says “government is bad.”  But through the lens of public choice, we see multiple reasons why the decisions of politicians, bureaucrats, and industry together make all of the regulatory ridiculousness almost inevitable.

Everybody Must Get Votes

Drive past many of the 23 licensed Massachusetts recreational shops open at the time of this writing and you’ll understand why customers might pay a premium to wait in the comfort of their own home. Lines wrapping around buildings, cops directing traffic, and neighboring businesses plastered with hostile no-parking signs are commonplace.

Such overcrowding screams excess demand, and it’s estimated that an astonishing 76 percent of cannabis sales in the state almost three years after the referendum remain on the black market. The maze of state regulations, protests by local governments, and a dormant federal ban meant it took almost two years for the first recreational location to become compliant.

Nobody should be surprised that when entrepreneurs have to thread a such a political needle, even the Cannabis Control Commission concedes that the market has a long way to go to “mature.” Those political obstacles also have their own vexing economic logic. In a world where many voters fear the unknown, it is often more politically expedient to overregulate and demonstrate the illusion of control rather than educate people not only about the specific product but the way market forces can provide effective checks against some voters’ concerns.

Everybody Must Get Taxed

If the commission recognizes it hasn’t licensed nearly enough sellers to compose a mature market for a legal product, why would it go to such lengths when considering new models such as delivery businesses to keep the product off the black market? Concern over weed falling into the hands of minors is understandable — less understandable are concerns about the quality or safety of unregulated products, still favored by 75 percent of the state’s consumers.

It’s time to talk about taxes. You see, the state along with municipalities collects 20 percent of every cannabis purchase from an officially licensed vendor: that’s the ordinary state sales tax of 6.25 percent, plus a special state excise tax of 10.75 percent, plus up to 3 percent that local governments can choose to collect. By the way, back in 2016 on the ballot initiative, the proposed special excise tax was 3.75 percent, which the Cannabis Control Commission more than doubled after it was out of voters’ hands.

The result is that every black market pot transaction is a lost opportunity for a consumer to park blocks away from a licensed store, wait in line an hour or more, and give state and local governments 20 percent of the cut. Viewed through this lens, Massachusetts has not legalized cannabis products so much as entered the drug market via a handful of chosen franchisees, with the extra competitive advantage that you could be fined or jailed if you buy from the competition.

Let freedom ring.

Everybody Must Get Licensed

The final piece of the puzzle is the licensed businesses themselves. Occupational licensing always leads to strange bedfellows, as potential entrants favoring low barriers become licensed and naturally favor high ones.

While the incumbent marijuana businesses in Massachusetts have not loudly lobbied to keep others out, probably a good public relations decision, the more subtle impact of this give-and-take between licensor and licensee is all over the early chapters of this heavily regulated market. 

Is it surprising, for example, that the majority of the businesses that first completed the arduous licensing process were already licensed by the state for medical distribution? And in the fight over licensing delivery businesses, it’s hard not to see incumbent sellers’ hand in proposed rules such as the one that says deliveries must originate from brick-and-mortar stores and delivery customers must first register at a physical location.

One might find fault in the decisions of many individuals from both government and its newly anointed class of cannabis entrepreneurs. But as public choice theory often suggests, there is no single bad actor, no collective evil being done by government or business. And this paints an even more pessimistic view of hands-on government regulation: bad people can be fired or voted out of office, but bad incentives when political and economic power collide are unavoidable.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research focuses on two main areas: policy and technology. On the policy side, Gulker looks at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker is interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy. Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.