It will be Easier and as Expensive to Smoke Marijuana in Colorado than Regular Cigarettes

Posted by PITHOCRATES - March 10th, 2013

Week in Review

The stoners, the high school and college kids and the baby boomer-hippies of yesteryear are ecstatic about Colorado decriminalizing marijuana.  For now they don’t have to sneak around and buy their weed from some shady drug dealer.  No, today they can walk down the road any time and walk into Harry’s and hold their head up high and say in a loud steady voice, “Harry, I want you to sell me some marijuana.  In fact, today I think I’ll have some Acapulco Gold, for I am a Coloradan.  But people in other states?  They cannot.  Because their states have never made the great leap out of the Middle Ages and the domination of alien Episcopal supremacy.”

(Okay, so I borrowed a little from Monty Python’s The Meaning of Life.  And by a little I mean a lot.  From the scene where the Protestant goes on about being able to buy condoms unlike his Catholic neighbors.  You can see a clip of that scene here but be warned.  It is not appropriate for the workplace.  And not suitable for young children.  If you’re not a man-boy with a somewhat sophisticated yet sophomoric sense of humor you may find this scene somewhat offensive.  But if you are go and buy the two-disc collector’s edition for your personal collection.  So you, too, can impress your friends by quoting these scenes verbatim.  Or alienate everyone around you.  Depending on who your friends are.  But I digress.)

Where was I?  Oh yes, Colorado has solved all of their problems.  They’ve decriminalized marijuana so responsible adults can enjoy this drug responsibly while no kids will.  (Yeah, right.  Pull the other.)  And they’ve figured out a way to bring more money into the state treasury by encouraging people to smoke marijuana.  Even though they frown on people smoking regular cigarettes.  And pretty much banned cigarette smoking everywhere.  For that stuff can get into your lungs and kill you.  First-hand smoke.  Second-hand smoke.  Even third-hand smoke.  That ashtray smell left behind long after a smoker extinguished his or her cigarette.  So Colorado is serious about the harmful effects of smoking tobacco.  Unless it gets you high.  Then apparently the smoke isn’t that bad for you after all.  But just don’t dare light up a cigarette in public anywhere in Colorado.  But if you do, to be safe and save yourself from the judgmental stares of others just make you regular cigarette look like a marijuana joint.  And then you can light that up anywhere and everyone will be cool with you.  Apparently.

So Colorado is doing the responsible thing for responsible adults who will now all follow the letter of the law.  Even though they used to violate state and federal law before Colorado decriminalized marijuana.  Which was and still is classified as a schedule I controlled substance.  Along with heroin and cocaine.  Which carry some pretty stiff penalties if you’re caught carrying.  So these people were willing to break a law that carried stiff penalties when the drug was still illegal.  But that shouldn’t be a problem now that it’s legal (see Tax, and tax again: America’s first market for recreational marijuana will be far from free posted 3/9/2013 on The Economist).

FREE-THE-WEED campaigners speak not of “legalising” marijuana but of “taxing and regulating” it. True to their word, the ballot measure they placed before Colorado’s voters last November, which won the support of 55% of them, was called the Regulate Marijuana Like Alcohol Act and contained provisions for a 15% excise tax. Now that the law is taking shape, the signs are that one of the world’s first fully legal marijuana markets (Washington state also backed legalisation) will have all the taxes and rules anyone could have wished for…

Most importantly, the group wants to maintain, for three years, the “vertical integration” model that has governed Colorado’s medical-marijuana industry. Under this system retailers must grow at least 70% of the dope they sell. This forces licence-holders to master a suite of skills from cultivation to distribution. The task-force also suggests that for the law’s first year, only established medical-marijuana dispensaries should be granted retail licences. Some campaigners mutter about protectionism, though grudgingly admit that dispensaries deserve some reward for their pioneering (and risky) work.

Mr Finlaw admits that vertical integration makes it hard to apply the excise tax: licence-holders will have an incentive to undervalue their product. That may help explain another proposal: to slap a tax on marijuana sales, on top of existing state and local sales taxes and the proposed excise tax. No figure will be presented to the legislature, but an “example” of 25% was floated in hearings.

Regulators say they need the funds to enforce their rules. But set taxes too high, fear campaigners, and you leave the illegal market in place, which destroys one of the principal purposes of legalisation in the first place. Either way, any new taxes will have to be approved again by Colorado’s voters, probably in November.

With that level of taxation it is unlikely to make it any less expensive than the weed they used to buy.  And now that the penalty for buying ‘improper’ marijuana may be only as severe as being caught with cigarettes on you purchased in a low-tax state.  Unless you have a tractor trailer full the punishment will be a slap on the wrist.  When Canada raised their cigarette tax drug dealers turned to smuggling cigarettes.  Just as lucrative.  With far less risk.  Yes, the illegally imported marijuana may sell at a lower price than in the past but with it being legal they will be able to make up for a lower profit per sale on volume.  Because a lot more people will be smoking marijuana now.  Besides, a lot of those kids will not be able to walk into Harry’s.  They’ll still need to buy their stuff on the black market.

Over-tight rules create opportunities for and cosy relationships between the industry and regulators. But Colorado’s legislators must perform a balancing act, because they are being watched by the federal government. Marijuana remains illegal under federal law…

Some members of the prohibition industry are running out of patience. On March 5th the president of the International Narcotics Control Board, an arm of the UN, said that marijuana legalisation in America violated international treaties and threatened public health.

Ironic, really.  It’s the Left that is pushing for the decriminalization of marijuana.  Despite their relentless assault on Big Tobacco and making it pretty much illegal to smoke a regular cigarette anywhere outside your home or car.  And they’re closing in on those, too.  If you have children.  Because of that third-hand smoke.  It is also the Left that wants to keep ceding power and sovereignty to the United Nations.  And here they are.  Violating an international treaty of that august body that they hold so dear.  Go figure.

The Left is an inscrutable bunch.  With politics driving their every action.  They champion individual liberty when it comes to sex and drugs but want to put you in jail for smoking a legal cigarette.  Because smoking is bad for your health.  Unless that smoke is from marijuana.  Then it’s no big deal.  They want a big world government to pass environmental regulations they can’t pass in their own country to regulate and punish capitalism but then ask who does the UN think they are telling them they can’t violate a treaty they don’t like?  Like decriminalizing a schedule I controlled substance?

Individual liberty for those who think like them.  And oppressive and punishing regulations for those who don’t.  This is the political Left.  Which is also the way things were in an absolute monarchy.  A totalitarian fascist, Nazi or communist regime.  An Islamist theocracy.  And any other oppressive regime where those in power lived by a different set of rules than those who they ruled over.  Despite expressing equality and egalitarianism it was more times than not like life for the poor animals on George Orwell’s Animal Farm.  Where everyone was equal.  Only some were more equal than others.

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LESSONS LEARNED #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - July 1st, 2010

ECONOMIES OF SCALE and vertical integration can do two things very well.  Make industrialists rich.  And make the things they sell cheap. 

The more you make, the less each thing you make costs.  Businesses have fixed costs.  Big one time investments in plant and equipment.  Businesses have to recover these costs.  Each thing they sell has a portion of these fixed costs added to its price.  The more they sell, the less they need to add to each unit sold.  This is economies of scale.  Think of bulk goods.  Warehouse clubs.  Places where you can buy large quantities of things at lower unit prices.  You may buy an ‘economy pack’ of 3 bottles of shampoo shrink-wrapped together.  The purchase price of a 3-pack will be greater than the price of a single bottle of shampoo at your convenient corner drug store.  But the unit cost of each of the bottles in the 3-pack will be less.  You save more over time by buying 3 bottles at a time.  Spending more, then, means spending less.  In time.

Few of us buy raw materials.  Few have a need for crude oil.  Iron ore.  Coal.  Limestone.  Manganese.  But they make the stuff we buy.  A lot of things have to happen before those raw materials make it to us in those things we buy.  It has to be mined or drilled/pumped.  Transported.  Processed.  Stored.  Transported again.  Processed again.  Stored again.  Transported again.  There are many different stages between extracting raw materials from the earth and incorporating them into a final product we consumers buy.  At every stage there are costs.  And inefficiencies.  Which add to costs.  By reducing these costs along the way, the component materials used at the final manufacturing stage cost less.  This reduces the selling price of the final product.  This is what vertical integration does.  It puts everything from the extraction of raw materials to the incorporation of those processed materials into the final product for sale under control of the final user.  It brings in a high level of quality, cost containment and reduction of inefficiencies into the entire process resulting in a high quality, mass produced, inexpensive product.

Not everyone can do these things.  You have to live and breathe the industry you’re in.  You have to understand it intimately.  An industrialist at the top of his game can do this.  A politician can’t.  States trying to take control of their economy have failed.  Every time they’ve tried.  Why?  Politicians are ‘intellectuals’.  They’ve never run a business.  They only thought about it.  And, somehow, that gives them the moral authority to tamper in something they are simply unqualified to do.  And when they meddle, they destroy.  Purposely.  Or through unintended consequences.  In the process, though, they enrich themselves.  And their cronies.

ANDREW CARNEGIE WAS a brilliant entrepreneur.  After working for a railroad, he saw the future.  Railroads.  And he would build its rails.  And its bridges.  With his Keystone Bridge Company.  Which used steel and iron.  So he built his Union Mills.  Which needed pig iron.  So he built his Lucy blast furnace.  Which consumed raw material (iron, coke, limestone).  So he secured his own sources of raw materials. 

His Lucy blast furnace set world records, nearly doubling the weekly output of his steel competitors.  No one made more steel than Carnegie.  For less.  In about 20 years, he brought the price down for steel rails from $160/ton to $17/ton.  And got rich in the process.

Economies of scale.  Vertical integration.  And innovation.  Carnegie hired the best people he could find and used the latest technology.  Always improving.  Always cutting costs.  Always making steel more plentiful.  And cheaper.  His steel built a nation.  Dominated the industry.  And destroyed the competition.  Of course, that drew the attention of the government.  And they tried to break up the steel giant because it was unfair to the competition.  Who couldn’t sell steel as cheap as he could.

JOHN D. ROCKEFELLER was a brilliant entrepreneur.  After trying the oil drilling business, he saw the future.  The refining business.  For America lit the night with kerosene.  And he would provide that kerosene.  At prices that a poor man could afford.  And he did.  And he saved the whales in the process (his cheap kerosene put the whale oil business out of business).

Like Carnegie, cutting costs and production efficiencies consumed him.  He built his own kilns and used his own timber for fuel.  He made his own barrels from his own timber.  He used his own horse-drawn carts, boats, rail cars and pipelines.  He bought up competitors.  He grew to dominate the industry.  By far the biggest shipper, he got better shipping rates than his competitors.  And he constantly innovated.  When others were dumping the gasoline byproduct from refining kerosene into the river (no internal combustion engine yet), he was using it for fuel.  He hired the best talent available to find a use for every byproduct from the refining process, giving us everything from industrial lubricants to petroleum jelly (i.e., Vaseline).

His company, Standard Oil, was close to being a monopoly.  When they controlled 90% of the market kerosene was never cheaper.  He brought the price down from $0.26/gallon to $0.08/gallon.  And that was an outrage.  We can’t allow any one company to control 90% of the market.  Sure, consumers were doing well, but the higher-cost competitors could not stay in business selling at those low prices.  So the government broke up Standard Oil via antitrust legislation (the Sherman Act).  To protect the country from monopolistic practices.  And cheap kerosene, apparently.

BILL GATES WAS a brilliant entrepreneur in building Microsoft.  The personal computer (PC) was new.  You couldn’t do much with it in the early days unless you were pretty computer savvy.  But programs were available that made them great business tools (word processing and spreadsheet programs). 

IBM created the PC.  And they licensed it so others could make IBM-like machines.  IBM clones.  The PC industry chewed each other up.  But Gates did well.  Because all of these machines used his operating system (Microsoft’s Disk Operating System – DOS).  Apple developed the Macintosh (with a mouse and Graphical User Interface – GUI) but it was expensive.  Anyone who used one in college wanted to buy one.  Until they saw the price.  So they bought an IBM clone instead.  And when Gates came out with Windows, they were just as easy to use as the Macs.

Because of the higher volume of the IBM platform sold, Microsoft flourished.  Software was bundled.  New machines came preloaded with Windows.  And Internet Explorer.  And Windows Media Player.  You got a lot of bang for the buck going with a Windows-based PC.  And Windows dominated the market.  Consumers weren’t complaining.  Much.  Sure, there were things they did bitch about (glitches, drivers, viruses, etc.), but it sure wasn’t price.

Of course, Microsoft’s competitors were hurting.  They couldn’t sell their products if Microsoft was giving away a similar product free.  Because they were hurting their competitors, the government tried to break up the company with the Sherman Act. 

THE NORTHERN SECURITIES SUIT of 1902 found a holding company guilty of not yet committing a crime.  Teddy Roosevelt’s administration filed a Sherman antitrust suit against Northern Securities.  This was a holding company for Northern Pacific, Great Northern, and Chicago, Burlington, and Quincy Railroads.  What’s a holding company?  It replaced a trust.   Which large corporations created in response to government’s attacks on large corporations.

Small competitors feared large corporations.  They could not compete against their economies of scale and vertical integration.  The little guys couldn’t sell things as cheap as the big corporations could.  So the government intervened to protect the little guy.  So they could sell at higher prices.

But businesses grow.  All big corporations started out as little guys.  And the growing process doesn’t stop.  So the big corporations had to find other ways to grow.  They formed trusts.  Then the trust-busters busted up the trusts.  The next form was the holding company. 

The trust-busters said that the big corporations, trusts and holding companies were all trying to become monopolies.  And once they eliminated all competitors, they would raise their prices and gouge the consumers.  Northern Securities never did.  But they could.  So they were guilty.  Because they might commit a crime.  One day.

ALL BUSINESS OWNERS aren’t morally ethical and honest.  But the market is, albeit cruel.  Economies of scales will always put the little guy out of business.  Sad, yes, for the little guy.  But for every little guy put out of business, millions of consumers save money.  They can buy things for less.  Which means they have more money to buy more things.  New things.  Different things.  From new little guys who now have a chance with this new surplus of purchasing power.

But when politicians get involved, consumers lose.  When they help a competitor, they help them by keeping prices high.  To keep competition ‘fair’.  For the politically connected.

Consumers never complain about low prices.  Only competitors do.  Or their employees.  Those working on whaling ships didn’t like to see the low price of Rockefeller’s kerosene.  But the new refining industry (and its auxiliaries) created far more jobs than were lost on the whaling ships.  We call it progress.  And with it comes a better life for the many.  Even if it is at the expense of the few.

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