David R. Henderson  

Less Output or Cartel Output: That is the Issue

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Or, at least, it's one of the most important issues.

As soon as I arrived in the United States in September 1972, I started paying close attention to California politics. I was fascinated by the number of initiatives on the ballot. Of course, I couldn't vote for or against any of them because I was not a U.S. citizen. But that didn't stop me from having my opinions.

One that I remember, that I think was on the ballot in November 1972, was an initiative to allow betting on dog races. The person who had pushed to get it on the ballot was the owner of a firm that, if the initiative passed, would be the only one allowed to take bets on dog races. In short, he would have a legal monopoly.

In the advertising I heard about the initiative, the opponents made a big deal about that. But, because I was learning so much every week from Armen Alchian, Chuck Baird, and other professors, l had a different thought: isn't positive output better than zero output? Think about our main objection to monopoly: it causes there to be less output and higher prices than if the industry were competitive. But no one was proposing a competitive industry: that wasn't on the ballot. The issue was whether the government allowed a monopoly and high prices or didn't allow a legal industry, which meant even higher prices.

I raise that issue because there's a similar initiative on the ballot in Ohio. It's called Issue 3. Jacob Sullum of Reason writes:

Although Kampia has a point, my main problem with Issue 3 is the cannabis cultivation cartel it would create: Commercial production would be limited to 10 pre-selected sites owned by the initiative's financial backers, who are investing in the gains to be made from the economic privileges they are trying to award themselves. This approach has the advantage of quickly raising a lot of money--money that can be used to pay marijuana mascots and produce ads featuring sympathetic beneficiaries of legalization (such as the mother who moved from Ohio to Colorado so she could treat her daughter's epilepsy with cannabis oil). The downside is that the crony capitalism embodied in Issue 3 disgusts a lot of people who otherwise support legalization.

But of course, if Issue 3 goes down to defeat, those 10 sites won't likely be selling. There will be some output, but it will be illegal. On the other hand, a cartel with 10 sites would be producing more output.


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COMMENTS (14 to date)
Ben H. writes:

I would say the issue is one of the negative consequences of allowing blatant rent-seeking and corruption of government. If you let that one guy have a legal monopoly on dog race betting, you've just sold your integrity down the river; good luck ever prying that monopoly out of his hands later, and good luck explaining why you're opposed to the soon-to-arrive flood of ballot initiatives from other enterprising individuals who would also like to have legal monopolies on their particular areas of business. If, on the other hand, you put your foot down and say that you think there should be a competitive market or not market at all, and that government is not to be used as a tool for creating legal monopolies for personal profit, then you maintain your integrity – and you have a hope that the next round of ballot initiatives might include a measure that opens up dog race betting to competition in a free market. Personally, I would hold the line against crony capitalism and lobbyist-run government.

ThomasH writes:

I agree with the analysis but do not reach the same conclusions in the two cases. If we want output of dog racing or marijuana, the better a monopoly or cartel than nothing. I'm not sure I want more output of dog racing but I do not see any reason not to want more marijana output.

At a meta level, a legal monopoly is better than prohibition because it is easy later to remove the monopoly. Like most Liberals I'm an incrementalist.

Daublin writes:

Notably, monopolies do erode in certain ways over time, so as to limit their negative effects.

One way they erode is that people will make demonstrations of what they're able to do as part of lobbying for the monopoly to be reduced. Even limiting ourselves to fully legal options, the general public will notice and will want the new guys to be welcome, much like Uber in the space of personal transportation.

Another way they erode is comparisons across state lines. If the Ohio monopoly does worse than the hypothetical Mississippi monopoly, then again, public pressure will arise to break down the monopoly.

Another way they erode is that the monopolist themself can notice the efficiency improvements in both of the above categories. To the extent the monopolist cares about money (and let us all hope that they do!), they will have every incentive to replicate what their competitors are doing.

Finally, the extreme version of the above is that they simply hire their would-be competitors to come work for them. In that case, the owner takes a cut and then everyone else is pretty much the same as they would be without the monopoly.

So sure, monopolies are bad. However, they at least get a legal industry off the ground at all.

David R. Henderson writes:

@Ben H.,
You have stated the other side well.
You wrote:
you have a hope that the next round of ballot initiatives might include a measure that opens up dog race betting to competition in a free market.
Yes, you have a hope. But notice that then there is less incentive for anyone to bear that upfront cost to get it on the ballot.
See both ThomasH’s and Daublin’s cogent points.
Thomas H’s point:
At a meta level, a legal monopoly is better than prohibition because it is easy later to remove the monopoly.
Daublin’s point:
So sure, monopolies are bad. However, they at least get a legal industry off the ground at all.

Eric Hanneken writes:
At a meta level, a legal monopoly is better than prohibition because it is easy later to remove the monopoly.

Is it easy? Once a marijuana cartel has been established in Ohio, it will become a political concentrated interest, with funds and incentive to oppose any future attempts to change the law.

David R. Henderson writes:

@ThomasH,
I agree with the analysis but do not reach the same conclusions in the two cases. If we want output of dog racing or marijuana, the better a monopoly or cartel than nothing. I'm not sure I want more output of dog racing but I do not see any reason not to want more marijana output.
Fair enough. At least we agree on the analysis.
But I want to add one thing more. I don’t think it should rest on what you want. I think it should rest on what peaceful people want as long as they do it peacefully. I can fairly confidently say that I will never wager on a dog race. And that fact should have precisely zero effect on whether I want to make it illegal.

David R. Henderson writes:

@Eric Hanneken,
I might be putting words in ThomasH’s mouth here, but I think he means that it’s easier to remove a monopoly than to remove prohibition.

Eric Hanneken writes:

I should note that Ohio has already established a casino cartel. I see no signs that it is in danger of losing its legal protection.

Andrew_FL writes:

@David Henderson-I suspect ThomasH's view is because he's skeptical that dog racing should count as peaceful activity. It may not harm humans, but, I imagine the argument would go, that it does harm dogs. And while dogs probably don't deserve the same legal status as human beings, I think most people probably view them as deserving more rights than, say, cattle.

I'm not sure I agree with that view, but I would think that's why he says he's not sure he'd want more dog racing output.

On the other hand, there's really no way to construe trade in and use of marijuana, or any drug, as violent in and of itself.

Michael Byrnes writes:

Well this was a thought-provoking post.

I think my answer may depend on whether we are talking about a general approach ("let's offer monopolies as a means to boost output") or an all-things equal arument about the particular situation David outlined.

Grant Gould writes:

I think this line of argument would hold better if the Ohio measure were merely a ballot initiative and not a constitutional amendment. As it is, however, the cartel will literally be written into the Ohio constitution. I think that constitutional concerns might reasonably be considered differently from supply concerns.

The black market can keep Ohio supplied with marijuana for a few more years, after all, while I doubt that it can keep Ohio supplied with a constitution.

(Once someone has a black-market constitution supplier up and running, that will be a different matter of course)

David R. Henderson writes:

@Grant Gould,
I think this line of argument would hold better if the Ohio measure were merely a ballot initiative and not a constitutional amendment. As it is, however, the cartel will literally be written into the Ohio constitution. I think that constitutional concerns might reasonably be considered differently from supply concerns.
Interesting point, and well said. Somehow I had overlooked the fact that it is a constitutional amendment.
That reminds me of a measure in California that I voted against some years ago that one might expect me to have voted in favor of. It didn’t even have the tension that this issue has. The state legislature had started applying the sales tax to snacks--candy bars, etc.--if I remember correctly. A measure on the ballot would have changed the California constitution to prohibit a snack tax. I thought it was trivializing the constitution to change it to prevent a snack tax, and so I voted against it. Although I’m still not sure I did the right thing. Of course, as we know from the economics of voting 101, it didn’t matter.

Mark Bahner writes:
Once a marijuana cartel has been established in Ohio, it will become a political concentrated interest, with funds and incentive to oppose any future attempts to change the law.

Every day that marijuana is illegal in Ohio is a day where people who might be able to benefit from marijuana for a host of maladies (Dravet's syndrome, inflammatory bowel diseases, possibly Crohn's disease, anxiety, nausea, pain, etc.) are suffering needlessly.

I don't see how a cartel can cause more damage than that.

Mark Bahner writes:
As it is, however, the cartel will literally be written into the Ohio constitution.

Hopefully, states around Ohio will legalize marijuana also, then Ohio residents can simply go to other states to purchase marijuana at lower prices.

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