Taxation and market power in the legal marijuana industry

We study tax and regulatory policy in the legal marijuana market using unique administrative data from Washington state. Washington's retail entry restrictions have resulted in firms with substantial market power who behave like local monopolists. We show how the presence of market power causes tax and regulatory policy recommendations to differ from standard models that assume perfect competition. Combining structural demand models with measured pass-through, we show that marijuana is not overtaxed at 37% but is still on the upward sloping region of the Laffer curve and that these taxes have high social costs and are mainly borne by consumers.