Friday, June 19, 2015

Why the MMPR Fails

Also available at Cannabis in

Joining the licensed producer monopoly is an expensive endeavour. It cost the Lexaria Corporation at least $20,000-a-month during their pursuit of a Marihuana for Medical Purposes Regulations (MMPR) application. Ultimately, the venture proved too costly. The food sciences company, focused primarily on cannabinoid compounds, has sold its interest in a Burlington, Ontario-based MMPR application citing “rising capital expenditure costs of construction and set-up, and rising ongoing costs of compliance with Health Canada regulations,” as their primary reasons for pulling out. This is something Cannabis in Canada has reiterated time and time again and even Lexaria's own press release alludes to the issue: Health Canada, through the MMPR, has “lessened the attractiveness of the legal marijuana growing market in Canada,” relative to other interests.

An application that can cost up to $20,000-a-month is not a result of the “free market” no matter how many times the term is used. Cannabis is a prohibited product; even for medical uses the federal government criminalizes production or sale of cannabis by anyone who isn't properly licensed. That used to include the 30,000-plus growers in Canada who now exist in legal purgatory. Under the MMPR, the number of producers licensed to grow and sell has dwindled to 19.

There is nothing “free market” about prohibiting the production and sale of medical cannabis to 19 privileged producers. The federal government is in fact strengthening prohibition laws. Without Canada's other market of medical cannabis farmers (50% of who are in BC), patients are at risk of losing their medicine. The supply for Canada's retail dispensaries and compassion clubs are not coming from the LPs. But by restricting the legal supply of cannabis to the LPs, the MMPR has created arbitrage opportunities. The LPs have flexibility not awarded to the former farmers under the older regulations. In the future, this may include supplying the retail dispensaries, since the LPs are the only legal sellers.

The MMPR encourages the political allocation of medical cannabis. Since the LPs have quasi-monopoly grants to produce a prohibited good, and since these grants specify how to produce the good, patients aren't deciding the kind of market they want. LPs must engage in politically motivated decisions because they have fewer avenues for information on supply and demand. LPs do have some competitors, but that number is arbitrarily restricted. In addition, each LP has a differently shaped demand curve for their cannabis. The LPs whose demand curves are inelastic reap the monopoly gain. Medical cannabis itself already has an inelastic demand curve in part because it is a medical necessity. Giving LPs quasi-monopolies won't do anything to correct this; it will in fact make things worse. Licensing fees and the other “ongoing costs of compliance with Health Canada regulations” act as penalty taxes on smaller firms with less capital. Lexaria Corporation, at $20,000-a-month, was one of these “smaller” firms.

In contrast, an entrepreneur can just open up a dispensary and start selling cannabis. There aren't even business licenses in most cases. A dispensary owner can look to see if his revenue is rising or falling. Rising revenues would indicate patients are happy with his business and keep returning for the excellent goods and services. Falling revenue would indicate the opposite. That's what a free market is.

inelasticdemand.pngInefficiencies get introduced into production as regulatory requirements put more emphasis on security measures than on other factors consumers ultimately value higher. A misallocation of resources and a malinvestment of capital are inevitable as LPs are cut off from the price signals of a genuine free market. Specific goods used in production mean less investment into other lines of production. For example, all financial investment into security measures may have been better used in research and development. This is information only entrepreneurs have, and they acquire it by assessing market conditions. The economizing activity in the market is hampered due to regulations/political allocations of resources and capital. In this controlled market for medical cannabis, the LPs are in a superior position vis-à-vis the patients.

In a free and fair market, there are no government-granted monopolies and cartels. The market-clearing price is set by sellers looking to maximize revenue. They will raise prices to the point that if they raise them any further their total revenue will drop. In retail dispensaries and compassion clubs, market-clearing prices are established through voluntary trade between buyers and sellers. As well, in Vancouver, there are 90 other dispensaries to compete with. Although still subject to other factors, prices in Vancouver's dispensaries are relatively elastic. That is to say, it would be unprofitable for the dispensaries to raise their prices beyond the market-clearing price. But it's different with the LPs and other controlled industries. It would be profitable for them to raise prices beyond the market-clearing price. And they can do so, while protecting their revenue, because of their quasi-monopoly grants from the federal government. To the detriment of patients, the LPs profit.

The LPs are not really competing with each other since a patient can only register with one LP at a time. To patronize two LPs simultaneously would require getting two different prescriptions and there's no guarantee that would work. As it stands, once one registers with an LP, one is stuck with that producer unless he or she wishes to start the prescription/registration process all over again. With these kind of restrictions – nothing like the retail market – the LPs are in a position to raise prices and restrict output. And indeed, with some at $15 a gram, and predictions of shortages absent of Allard, this is exactly the result we're getting.

Not only are the LPs detached from the “free market” they were advertised as being, we can't even say the LPs are economizing in the traditional sense of the word. Through their quasi-monopoly grants, resources that are used up in creating and maintaining LPs that may have actually had more highly valued uses in other sectors of the economy.

It is the incentive of every LP to use their revenue from quasi-monopoly grants to capitalize on the legal privilege itself. That is, use the extra money you make from having a quasi-monopoly to ensure that the number of competitors stays low. This can be done by contributing to political campaigns and lobbying. It's also popular to have crony-capitalists “hire” people for non-existent positions in their company. These employees are officially paid for purposes other than lobbying but political lobbying is all they do.

Finally, there is the argument for quality control, as if every negative aspect of the MMPR can be saved by superior quality standards. But why are they superior? LP quality control is simply what the government – not the patients – defines as “lower-quality” or “higher-quality” cannabis. In the freer and fairer retail dispensary market, patients define the relative term of “quality” by buying (or not buying) according to their personal tastes and preferences. Quality standards merely shift decisions from the patient to arbitrary government bureaus that impose rigidities and monopolization. In a free market, there are numerous ways to address fraudulent sellers. There is no guarantee that an army of government administrators can or will do the job. And that is the ultimate lesson of the MMPR.

There is no guarantee that an army of government administrators can or will do a better job than the matrix of hundreds of thousands of patients, dispensary and compassion club owners, and the 30,000-plus growers who existed before the MMPR and continue to fight their battle in court. The MMPR can only be redeemed if the former growers are grandfathered in and the government red-tape for prospective LPs is greatly reduced, with acknowledgement that the greater supply of cannabis, the less value it fetches on the street and thus the excessive security requirements are unnecessary. Furthermore, all patients should have the option of growing a small number of plants for themselves. However, if or when these changes are made, the modifications would be so numerous that an entirely new regulatory scheme may be needed. But why? If patients have an exemption from the Controlled Drugs & Substances Act as it relates to cannabis, why not let an industry – including a regulatory industry – build up around that exemption? Patients don't need a federally mandated exemption scheme; they just need to be left alone.

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