October 25, 2010

Supply Side Sense for Marijuana Dispensaries

This article from the Colorado Springs Gazette provides several possible explainations for why medical marijuana dispensaries in Colorado Springs and the unincorporated county areas are having trouble staying in business. The article addresses the start ups needing capital, a solid business plan, and good customer service. The models for perfect competition tell us a lot about this story that the article did not address. The dispensaries going out of business is not a result of bad customer service or poor business plan per se, it is a basic result of perfect competition. When this market opened, all the suppliers were at an initial positive economic profit postion. Although the suppliers cannot see the increase in demand, they did see the increase in price the rise in demand caused and they responded by opening more and more dispensaries. More suppliers entered the market seeing the positive profits being obtained by the suppliers, perhaps shifting their resources from previous business ventures because according to the definition of economic profit, every other market was in a less favorable position than the dispensaries. As more and more dispensaries opened, this shifted the short run supply curve out, causing prices to fall, and the suppliers profit to decline until, now, they are in a negative economic profit position. As the model shows us, suppliers must now leave the market as they reach the shut down point on their cost curves.

Combine the cyclical effect of the perfect competition model with the recent changes in regulations and laws for dispensaries, and the market should regain its equilibirium profit postion, and potentially, with the influence of government, a positive economic postion.

With the passage of the moritorium on dispensaries within city limits, the number of suppliers will soon decrease even more as potentially ( this is still under discussion) only dispensaries in the unincorporated areas of town will retain their tax and business licenses. However, no new businesses within the city limits with be granted licensture. We know that changes in regulations and laws shift the supply curve, and in this case, to the left, thus prices will rise as the number of suppliers decreases, and those lucky few in the county jurisdiction may make a success of their businesses yet. If they can cover their fixed costs in the short run, or even a portion of their variable costs as well, and hold out long enough for the competition and the city based suppliers to go out of business, they may not reach the shut down point and be able to stay in business. Well...that is until the federal government decides to take over the medical marijuana business altogether in order to obtain a new revenue stream...but that's another discussion.

3 comments:

John Williams said...
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John Williams said...
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John Williams said...


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