Are you an entrepreneur interested in getting in on the legal cannabis market? If so, pick one of the thirty-seven states that allows medical or recreational use and file for a permit. Just be prepared to discover that getting a permit is not going to be easy. Both states and local municipalities tend to limit the number of permits they issue.
Permitting and licensing have been part of the cannabis game since California and Colorado began pushing for legalization years ago. Every state that now has a cannabis program in place – be it medical, recreational, or both – requires permits for growers, processors, and retailers. Unfortunately, limiting the number of permits in a given jurisdiction is normal. Yet it doesn’t make any sense.
1. Artificial Market Control
The Lompoc Record recently published an opinion piece written by Utah psychologist Dr. Kenneth Brent Olson, a noted Libertarian who now lives and works in California. He made a compelling case against permit limits. In essence, his argument is that permitting requirements amount to artificial market controls that only continue to drive the black market.
It is hard to argue against Olson’s logic. For starters, it has been estimated on more than one occasion that California’s black-market dwarfs the legal market. How can that be? California is one of the most liberal states when it comes to cannabis use. Yet with such liberal laws in place, users still prefer the black market. Why? Because they can buy their cannabis cheaper from illegal operators.
That is what government permitting does. A permitting process that limits the number of active businesses artificially stifles competition. It stifles innovation and growth. Ultimately, it leads to artificially high prices because license holders know the competition will be limited once all the permits are issued.
2. Not Just Recreational States
It should be noted that recreational states are the only ones suffering with the consequences of permit limits. Medical-only states are hurting themselves, too. In Utah, for example, there are only six licensed growing operations. Their combined efforts are not enough to meet patient demand. As a result, Provo’s Deseret Wellness says the state’s fourteen medical cannabis pharmacies cannot keep enough product on hand.
Whenever demand outstrips supply, what is the result? Higher prices. Right now, Utah represents a seller’s market so to speak. Growers, processors, and retailers are all able to charge higher prices because demand routinely outstrips supply. Furthermore, no new grower licenses mean very little hope of increased cannabis production.
3. Not Really Protecting Markets
Olson argues that states and municipalities limit the number of permits they distribute in order to protect the market. The thinking is that a limited number of permits will encourage investors to pump money into the system. That it does. But it also encourages those investors to maximize profits over innovation, quality, and actually taking care of customers.
When permits are artificially limited, those who hold them are artificially protected against competition. All they have to do is pay their annual fees and they are good to go. They do not have to worry about an unlicensed company coming in and beating them in the open market. Thus, there is no incentive to do better.
Limiting permit numbers only protects the market in the short term. It guarantees that the initial investment required to get a cannabis industry off the ground in a given jurisdiction is there. But once the industry is up and running, continuing permit limits does the exact opposite. In the end, limiting permits does not really make a lot of sense. But very little of what government implements does.
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