“Being Thoughtful About Cannabis Legalization and Social Equity: Some Opportunities, Puzzles, and Trade-Offs” by Beau Kilmer (a senior policy researcher at RAND Corporation).

Published in 2020 in The International Journal of Drug Policy, it examines the broader economic and social implications of cannabis legalization, with a specific focus on how federal legalization could disproportionately disadvantage small businesses compared to large ones.

Key Findings on Business Impacts

The study uses economic modeling and evidence from early state-level legalizations (e.g., Washington and Colorado) to highlight differential effects:

• Price Declines and Market Dynamics: Legalization reduces risk premiums (e.g., from federal illegality) and inefficiencies in illicit markets, leading to falling cannabis prices. This is amplified by economies of scale for large producers, technological efficiencies, and increased supply. Federal legalization would accelerate this by enabling interstate commerce, imports, and entry by major corporations (e.g., big tobacco, alcohol firms, or even Amazon-like players), potentially “bottoming out” prices further.

• Disadvantages for Small Businesses: Small operators struggle most with these dynamics, as lower prices erode their thin margins. In lightly regulated commercial markets, small firms become less competitive against larger ones that can scale production, negotiate better supply chains, and absorb costs. Early data from states like Washington showed small cannabis businesses closing or selling out to bigger firms at steep discounts (e.g., 50-70% below market value).

• Advantages for Large Businesses: Larger firms benefit from consolidation opportunities, vertical integration, and the ability to invest in branding, R&D, and lobbying. The study notes that without safeguards, federal reform could lead to a “winner-takes-most” scenario, where a few dominant players capture most market share, similar to trends in craft beer or craft spirits post-legalization.

• Broader Economic Implications: While overall industry growth could create jobs and tax revenue, small business closures might concentrate economic benefits in fewer hands, exacerbating inequities. The study estimates that without intervention, small firms could see revenues drop 20-50% in a fully legal federal market, based on price elasticity models from state data.

Recommendations

To mitigate harms to small businesses, Kilmer suggests exploring non-commercial models like government monopolies on production/sales (inspired by alcohol control states) to stabilize prices and allocate revenues to equity programs. He also advocates for license preferences tied to social equity goals but warns they may backfire if small licensees can’t compete long-term. Jurisdictions should pilot and evaluate options using data-driven simulations.

You can access the full open-access article here: https://pmc.ncbi.nlm.nih.gov/articles/PMC7215057/

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Full study text copied and pasted below for non-commercial educational considerations for cannabis patient first advocates (as opposed to business oriented advocates). For those interested in profit over people the following may cause mental anguish:

World Psychiatry

. 2020 May 11;19(2):194–195. doi: 10.1002/wps.20741

Being thoughtful about cannabis legalization and social equity

Beau Kilmer ¹, Erin Kilmer Neel ²

• Author information
• Article notes
• Copyright and License information

PMCID: PMC7215057  PMID: 32394572

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Hall and Lynskey ¹ highlight several out­comes featured in cannabis policy debates and correctly note that they will be shaped by the type of legalization that is imple­mented. Their excellent review of the e­merging evidence about how the commercial ap­proach influences health outcomes will hopefully inform future debates in the US and elsewhere.

A related outcome increasingly receiving attention in these debates is whether cannabis legalization can be used to promote social equity and help communities of col­or that have been and still are disproportionately affected by prohibition. Indeed, at a time when some in the US are discuss­ing reparations and how to acknowledge and address the fact that the country’s econ­omy was heavily built on slavery, this is a parti­cularly salient issue to consider.

Cannabis arrests have dropped dramatically in legalization states, although in some places they were already falling before the policy change2, 3. Overall, fewer people of color are being arrested for cannabis in legalization states, but this does not mean that legalization will eliminate racial and ethnic disparities in cannabis arrests ³ .

Having a criminal record has implications for health and economic well‐being and, in the US, there are additional consequences associated with having a drug offense on one’s criminal record ⁴ . For example, in some places a cannabis offense can make it harder to access public housing or work in the newly legal industry. While the early efforts to legalize cannabis in the US did not directly address expunging criminal records, jurisdictions soon began to make it easier for individuals to clear these cannabis offenses from their records ⁵ . Some places have gone further by automatically expunging these offenses.

Beyond issues surrounding criminalization, an increasing number of US jurisdictions are implementing social equity programs which give preferences for business licenses to people from communities disproportionately affected by cannabis prohibition ⁵ . Some of these programs also provide technical assistance for those who are new to the process of starting and growing a business. There are also some efforts to directly target cannabis tax revenues to support these communities. For example, one Chicago suburb (Evanston) recently announced that it plans to set aside some of its cannabis tax revenues to help fund its new local reparations program for African Americans.

While it is too early to evaluate the effectiveness of these efforts, their utility must be considered in the context of the economic realities of cannabis legalization, especially as they are unfolding in the US. In theory, there are multiple reasons why legalization will push down cannabis production and distribution costs, which can in turn influence prices5, 6. First, legalization reduces the risk of arrest for sellers, which decreases the risk premium they must be paid. Second, the “structural consequences of illegality” create inefficiencies that will no longer exist in a legal market ⁷ . Third, firms can take advantage of increasing economies of scale if large producers are allowed. Fourth, with legalization it will be easier for producers and processors to benefit from improvements in technology. With declining costs in a competitive market, we would expect prices to decline.

Large declines in cannabis prices can affect revenues for governments and businesses, which can in turn affect efforts to promote social equity. If cannabis taxes are set as a function of its price (e.g., Washington applies a 37% excise tax on retail purchases) and the price declines, so will the tax revenue available for social equity programs (although this could be offset by an increase in total cannabis sales). Price declines can also make it harder for small businesses to stay competitive with larger firms. Thus, giving a license preference to a small business that does not have much of a chance in a lightly‐regulated commercial market could be counterproductive. It might make some people worse off than if they invested their money elsewhere.

This is not a theoretical concern. Hall and Lynskey note that cannabis prices are already falling in places that have legalized. Further, in early legalization states such as Washington, there are reports of small cannabis businesses closing down or being bought out at a steep discount by larger firms ⁸ .

While an increasing number of US states are creating commercial cannabis regimes, this activity remains illegal under federal law. Among other consequences, federal prohibition is preventing some of the largest corporations, including alcohol and tobacco companies, from getting involved in the industry. US federal legalization could cause cannabis prices to bottom out, especially if imports are allowed and Amazon can deliver. This will make it even harder for small businesses to compete.

But there are many approaches to legalization5, 6. Hall and Lynskey mention a few, including a government monopoly on cannabis production and sales. Government stores could play an important role in promoting social equity if the revenues are thoughtfully allocated. Since the government would set the price instead of the market, this could prevent the large price declines. Further, this approach would allow the government to keep the revenue instead of having it go to profit‐maximizing firms. If a certain percentage of these revenues were allocated to evidence‐based programs to build wealth for historically affected individuals, this might help improve economic conditions.

There could be other social equity and public health advantages to the government monopoly approach. In addition to stabilizing prices and revenues, it would be easier to limit the types of products and control marketing in the US with this approach versus the commercial model ⁶ . Further, liquor stores tend to concentrate in minority communities and there is some evidence suggesting that this is happening with cannabis outlets ⁹ . Thoughtful siting of state‐operated retail stores could avoid this type of predatory concentration.

Of course, it is possible to both give license preferences and set aside tax reve­nues for programs supporting social equity; they are not mutually exclusive. But given declining prices and the dominance of the for‐profit commercial model in US policy discussions, it is unclear whether license preferences will ultimately have the desired effect.

We applaud the public servants who have worked hard to implement social eq­uity programs in places that have legalized cannabis. Our hope is that jurisdictions considering alternatives to cannabis supply prohibition and seeking to improve social equity outcomes – and public health – not limit their discussions to the “for‐profit with license preference” model. We encour­age these jurisdictions to consider the pros and cons of various legalization options as well as use the growing evidence about the economics of legalization to implement an approach that is most likely to succeed in its social and economic goals.

References

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