Innovation Law & Policy eJournal | 2019
License Quotas and the Inefficient Regulation of Sin Goods: Evidence From the Washington Recreational Marijuana Market
Abstract
This paper studies the welfare impacts of license quotas in markets for ` sin goods and how their implementation creates inefficiency. Retail licenses are often geographically restricted rather than allotted to the most efficient areas and may be randomly distributed. To study this allocative inefficiency, I develop an entry model, estimating it using data from the Washington marijuana market. I find that free entry increases surplus 18% relative to a baseline simulation of Washington’s license regime. Geographic misallocation and random allocation account for 58% and 13% of this change, respectively. I also study tax policies that control for externalities of consumption.