Day 6: Emerging Equity Risks in HB1438

With a new framework that better identifies the equity framework in HB1438, there is an opportunity to clearly identify observable risks in the Bill. These risks have been bifurcated in terms of Economic Risks and Social Policy Risks. 

Economic Risks are defined as potential negative externalities of creating and regulating the cannabis market by way of the chosen policies of the legislature. Social Policy Risks are defined as potential negative externalities of the policies incorporated in HB1438, but are considered externalities outside of an economic lens.

In reviewing the Bill, five Economic Risks have been identified and four Social Policy Risks have been identified. 

Economic Risks

1. Over emphasizing Supply Side of the Market

   • In determining whether more Adult Use Dispensing Licenses are granted after January 2021, the Bill calls for cursory observation of demand by analyzing (1) purchaser wait time and (2) travel time to the nearest dispensary. However, if the marketplace is to be sustainable, regulators may need to consider other factors that impact demand in normative economic frameworks. This includes: price, consumer income, tastes and alternative options. The Bill restricts dispensaries’ ability to discern what products they will carry and with whom they will work by preventing dispensaries from refusing to work with a cannabis producer ‘that has the ability to properly deliver the product’. Therefore dispensaries may not be able to adequately respond to consumer tastes. For example, if one product is favorited in a particular geographical region, then a dispensary may not be able to keep up with demand. Additionally, there is a restriction in price discrimination by cannabis producers (cultivation and grow facilities) to retailers (dispensaries). This may result in an inability to compete in markets where there is more unregulated cannabis sales (alternatives) available because dispensaries simply can’t afford to compete with unregulated prices at a fixed wholesale price. Price discrimination allows for producers to charge retailers the highest amount they are willing to pay for a product. This amount differs depending on the size, experience and gross sales of the purchaser. These rules were clearly meant to prevent discrimination between suppliers, but in effect, they may create inoperable market conditions.

2. The Problem of Artificial Scarcity

   • The State may create artificial scarcity by decreasing the total amount of square footage of cannabis that may be produced at any given time. However, some free market principles discourage artificial scarcity because it reduces efficiency and innovation. This is underscored by limiting what firms in the Illinois market are permitted to do with surplus or expired cannabis product. For example, dispensaries are required to destroy ‘expired’/ excess product. However, in an unregulated market, a firm may experiment with excess product, eventually developing an innovation that can be brought to market.

3. Overlooks Value of Price Discrimination

   • The State prohibits cannabis producers from charging dispensaries different rates to purchase product, outside the context of bulk discount. While this policy may intend to prevent pricing smaller consumers out of the market, negotiating price is a key feature of free market behavior. A smaller dispensary based in low volume market may also be able to negotiate a price that maximizes their profit. Simultaneously, this rule favors larger operators who would logically be able to purchase more and eat the risk of not being able to sell all the product.

4. Reduces Differential Advantage

   • In general, the State is promoting identical services by different retailers and producers. This may affect a key feature of entrepreneurship which is selling products in a manner that distinguishes the firm as unique. A smaller firm may not be able to compete with a larger firm if they are required to compete in exactness and sameness. Additionally, the Bill relies on a geographical interpretation of a market that may not be the best assessment of the time, place and manner in which cannabis will be purchased in an increasingly mobile society. In fact, consumers may be more interested in going to a dispensary further away if they value, for example, the size of the dispensary. A smaller dispensary may need to rely on nicheness to be competitive (i.e. shopping at Walmart versus shopping at the corner store).  

5. May Create Monopolies

   • The Bill legalizes cannabis after a few, larger firms, have already been participating in the Medical Cannabis market for years. They inherently have a strategic advantage in process, cash reserves and regulatory management. This may create a substantial hurdle for new suppliers to enter the market with much less ability to strategically adjust to shocks in the market.

Social Policy Risks

1. A Modern and Subtle War on Drugs

   • A key feature that made the War on Drugs so punitively efficient was federal funding that incentivized local police departments to pursue arrests in drug crimes. In his book, Rise of the Warrior Cop, Radley Balko describes how the 1988 crime bill created ‘Byrne grants’ which funded local police departments to fight drug crimes.  “Over the next twenty-five years, Byrne grants would send billions of federal dollars to police departments across the country to fight crime in what amounted to larger, better-funded, more ingeniously planned, and thus more successful [War on Drugs].” The Bill establishes a Class 4 felony for any retailer selling cannabis without the appropriate license while simultaneously providing funding to the State Police, proportionate to the amount of revenue generated from taxes and fees in the cannabis market. A “retailer” is not clearly defined in the Bill, so it is theoretically possible to broadly interpret a retailer. For example, an individual who buys cannabis, chooses not to consume it and resells it to a close friend may be considered a retailer. This individual could be committing a felony. The result of this ambiguity and potential for broad interpretation may create a modern, localized War on Drugs that could be just as damaging, but less salient because in this instance, cannabis consumption is legal and so there may be less impetus to make cannabis-related arrests as visible to the public (as a form of deterrence). 

2. Administrative Felonies

   • The Bill calls for an incredible amount of data collection, record keeping and reporting by cannabis businesses. Failure to do so is also made a felony in the Bill. This may run the risk of incarcerating individuals who may make administrative mistakes in earnest. Additionally, larger firms have an inherent strategic advantage in records management.

3. Hurdle of Home Rule

   • The BIll gives an incredible amount of licensing and zoning power to municipalities. This may result in an overwhelming of zoning out neighborhoods with zoning types that are more prevalent in majority-minority communities. While there may be reinvestment of fees and taxes into these neighborhoods, it is possible that they will not have local access to the product.

4. Excessive Administrative Involvement

   • The Bill calls for some administrative participation of 15 different government agencies. This reflects an incredible amount of agency participation in a single and abrupt change in law and may result in administrative headaches, reducing equitable access to Public Administrative services in the cannabis industry.