Uruguay Cannabis Regulation: Right Idea, Wrong Way

Español Uruguay’s Jose Mujica is a brave and interesting world leader. A President famous for his thrift, he was the first sitting world leader to take definitive action on cannabis legalization. He should be applauded for these unprecedented efforts — to a point.

Legalization is well and good, and a positive step, but it is simply the first of many. It is notable that in campaigns to legalize cannabis, the word “legalize” is, almost without fail, soon followed by the word “regulate.” Indeed, the famed, failed California ballot Proposition 19 was named the Regulate, Control & Tax Cannabis Act. The regulation side is just as important, if not more, than simple legalization.

It is on the regulation side of the issue that Mujica fails. To quote Bloomberg View’s Raul Gallegos, “Clearly Mujica doesn’t get it.”

The proposed regulations are a jumble of goals and misaligned incentives. The government will hold a monopoly of seed imports, and will be the sole commercial source of cannabis. The government will limit the number of varieties available to a handful of strains, and maintain criminal penalties for anyone caught with cannabis that does not genetically match these strains. There will be no market competition on either price, quality, or other aspects.

Buyers will be required to register with the government prior to purchasing the drug. Given the historically illicit nature of the market, there is every reason to be weary that users will be reluctant to sign up.

Mujica has made clear that his primary goal is to completely crush the marijuana black market, which he blames for high crime rates. However, both aspects mentioned above will make this task more difficult. By introducing artificial rigidity to the market, it cannot completely cater to demand. It is in these market niches that the criminal gangs Mujica so despises could persist.

It has been noted that the purchase limit of cannabis will be 40 grams, about 1.4 ounces, per month. Gallegos and others have recognized that this may drive some users to the black market. However, I am doubtful that this will be the case. For all but the heaviest users, it is unlikely that this specific aspect of the regulation will drive the market underground. Compared to the above issues, this is a minor one.

A final important aspect that must be highlighted is the subsidy. In an attempt to undercut the gangs, the government has mandated a price ceiling of US$1 per gram. In their excellent survey of scale economies in cannabis production, PhD economists Angela Hawkins and James Prieger find that, even after 30 years, the long run average cost never drops below this rate for even large scale indoor production. Greenhouse-based production only hits that level in moderate sized facilities after 3 years. All of this means that in order to fill market demand, Uruguay will need to subsidize cannabis in the short run, and possibly the long run as well, because it is unlikely that the entire volume of the drug will be produced using best industry practices in the long run.

Source: BOTEC
Source: BOTEC

So not only is the Uruguayan government creating self-defeating goals, but they will be forcing taxpayers nationwide to subsidize the drug. All of this raises the question: will the Uruguay legalization succeed, or will it fail due to the government’s own regulation? In any case, the Uruguayan experience will be informative to regulators in the United States. Here’s hoping they’re watching.

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