Why minimum unit pricing for cannabis leaves me cold

Minimum unit pricing – charging a minimum price for temptation goods – appeals to some students of cannabis legalization.

To me, government monopoly or high taxes can work better to serve policy goals. I’m just starting to think about this, and looking for pushback.

  1. The successes claimed for minimum unit pricing often involve loss leaders – where temptation goods are sold at a low price so as to bring customers in to buy goods that produce more profit for the seller. To the extent that cannabis commerce is isolated, that problem goes away. Most cannabis retailers in the United States sell little other than cannabis. They may sell pipes, papers, and T-shirts, but none sell alcohol. I don’t know of any that sell food (other than cannabis-infused food) or household goods. So any price-cutting that cannabis sellers do today goes pretty much straight to the bottom line. Sellers are hardly making up for the loss by selling non-cannabis products..  A well-regulated cannabis market lets cannabis seller sell nothing or almost nothing but cannabis, I think.

Here’s why I think any success of MUP is in large part a response to loss leaders. In the U.K., “Supermarkets have contributed to this increasing affordability by engaging in aggressive cost-cutting of alcohol, sometimes selling alcohol as a loss leader and/or below the cost of duty alone.” https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3966757/.

See also https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0ahUKEwjCsaerk67TAhUqsVQKHaI3CFcQFgg2MAM&url=http%3A%2F%2Feurocare.org%2Fcontent%2Fdownload%2F13962%2F76714%2Fversion%2F1%2Ffile%2FAAI%2Bminimum-pricing-fact-sheet.pdf&usg=AFQjCNGLOafOzdrj7UioyILtd84U9O3j-g, downloadable pdf from www.alcoholireland.ie, “The national charity for alcohol-related issues,” which has this: “Large multiple retailers can sell deeply discounted alcohol as a draw to attract customers – an increase in tax can easily be absorbed and off-set by increasing the prices of other goods.” But see https://www.theguardian.com/society/2017/jul/29/big-tobacco-manipulating-cigarette-prices-to-thwart-anti-smoking-tax?CMP=Share.

Minimum unit pricing for cigarettes, often sold in convenience stores, also seems a response to loss leaders in the United States. Indeed, tobacco sales are huge for such stores: “According to the National Association of Convenience Stores (NACS) State of the Industry (SOI) data projections, cigarettes and OTP [other tobacco products] comprised 36% of in-store sales in 2016, ahead of foodservice (21.7%), packaged beverages (15%) and center of the store sales (9.8%).” https://www.cstoredecisions.com/2017/06/20/cigarettes-remain-top/

  1. The profits from minimum unit pricing go into the hands of cannabis sellers. The argument that those profits are no problem goes this way: Minimum unit pricing “doesn’t affect merchants much — they don’t make [extra] profit on it because while prices go up sales volume goes down.” Maybe so, for gross profit. (Maybe not even then – I’m not sure the balance works that way.) But even if so, they make the same gross profit with less inventory, and less capital in use. That sends ROI – return on investment – up.  That increase creates an incentive to sell the product that policy disfavors. Sellers can use non-price lures to attract buyers to goods whose price has a floor. That is, high gross margins push sellers to advertise the bad products (if laws let them) – or at least to display them prominently, or to push via word of mouth.

Indeed, the Tennessee convenience store lobby supports “minimum mark-up” legislation for cigarettes aimed at the goal that minimum unit pricing seeks. https://www.tfca.info/minimum-mark-up-for-cigarettes

  1. The popularity of minimum unit pricing for alcohol in the United Kingdom arises in part because “devolved administrations there (the Scottish Parliament and the Wales and Northern Ireland Assemblies) who have no powers over commodity taxation. The UK Government in Westminster is less bothered about MUP because they can affect price through taxes – the devolved administration only hope of regulating through pricing is to create their own MUPs.” I hear this via email from Henry Yeomans, Assistant Professor at the University of Leeds (U.K.) and author of a thoughtful though paywalled article on minimum unit pricing, “Regulating drinking through alcohol taxation and minimum unit pricing: A historical perspective on alcohol pricing interventions,” http://onlinelibrary.wiley.com/doi/10.1111/rego.12149/abstract.

In the United States, our “devolved administrations” — states and even localities — can tax.  So I’m curious about why some states impose MUP for cigarettes.  I suspect it’s the loss leader problem, which need not be present for cannabis.

4.  Taxes and government stores help fund our common endeavor, government. Minimum unit pricing doesn’t. Henry Yeomans emailed this: “In the UK, it is certainly true that MUP is designed as a way to stop large retailers using alcohol as loss leader. It is also partially designed to limit the sort of substitution that can occur if a high tax only applies to certain drinks.” That is, in that case (which is not every case), minimum unit pricing corrects a distortion or an error in the taxation scheme. Why not correct the error directly?

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Lots to think about.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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