Uruguayan government: “monopoly” on pot

Last week, Uruguay’s government passed legislation to legalize marijuana. While the government will not be growing any cannabis plants (they are leaving that to private cultivators and farmers), the state will be playing a major role in the market… by fixing the price for marijuana at $1 per gram.

The rationale behind this production legalization and price fixing is to limit the amount of marijuana being trafficked into the country (mainly from Paraguay). As many of you may know, the narcotics trafficking business in Latin America is wrought with intense violence and organized crime. By fixing the price at $1 a gram, government officials believe this initiative will drive these traffickers out of business (at least in Uruguay). However, as all government interventions go, we need to ask ourselves, what are the possible unintended consequences lurking around the corner?

The issue I have is not with the legalization of marijuana, but with the price-fixing component of the legislation. Interventions into the market distort information (price) signals, forcing entrepreneurs to work off of incorrect information for their profit and loss calculations. Given that the drug market is already entrenched in these distortions, is this price-fixing component of the legislation a step in the right direction, or does it just complicate matters further?

The incentive structure, given the fixed price, is not the same as it would be in a free market. Any incentive that could have pushed these traffickers to move away from violence if it resulted in greater profits has been removed. Perhaps these violent traffickers will leave the marijuana business in Uruguay, but will they relocate efforts to other countries, or perhaps begin focusing on different illegal narcotics to traffic into Uruguay? If these new freedoms being granted to Uruguayans are coming at the cost of increased violence in other countries as a result of this price-fixing component, should we consider this a success?

3 thoughts on “Uruguayan government: “monopoly” on pot

  1. As always, the sellers will have to find workarounds to run their business properly. “Required donations” may be used but they won’t have legal support if they don’t get the full agreed to amount.

  2. “If these new freedoms being granted to Uruguayans are coming at the cost of increased violence in other countries as a result of this price-fixing component, should we consider this a success?”

    I would say yes.

  3. Interesting piece; too short. Two questions. (The US press has not covered well this interesting experiment.) How does the Uruguay government expect to enforce its price fixing? What’s to prevent a private party offering $1.10 and thereby causing the supply to increase? Is the government in a position to match any demand at all with a $1 gram offer? Second, you don’t tell us what the legal status of growers will be. Will their activity be legal? Will they be expected to sell only to the government ?(Is this what you use the word “monopoly”?) I ask because, I think that in California today, there is limited legality of cannabis sale and use but no clearly defined legal way for retailers to procure it. This is like asking for unintended consequences of policy. (If I am wrong and if there is a legally well defined way to obtain cannabis, I am confident a reader will correct me in about two minutes.)

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