Marijuana Taxation and Imperfect Competition

53 Pages Posted: 17 Feb 2020

See all articles by Chris Mace

Chris Mace

University of Utah, David Eccles School of Business

Elena Patel

University of Utah - Department of Finance

Nathan Seegert

University of Utah - Department of Finance

Date Written: January 18, 2020

Abstract

We investigate the tax implications for the new recreational marijuana industry in the United States, which reached a size of \$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% of total marijuana tax revenues in 2015. This calculation, however, depends critically on estimates of consumption externalities.

Keywords: Marijuana, State Taxation, Deadweight Loss

JEL Classification: H21, L13

Suggested Citation

Mace, Chris and Patel, Elena and Seegert, Nathan, Marijuana Taxation and Imperfect Competition (January 18, 2020). Available at SSRN: https://ssrn.com/abstract=3521911 or http://dx.doi.org/10.2139/ssrn.3521911

Chris Mace

University of Utah, David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Elena Patel

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Nathan Seegert (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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