Cannabis retail licenses: lotteries v. auctions

If you have more applicants than licenses and don’t want to select, why a lottery rather than an auction?

Washington State has more applicants for pot-shop licenses than it has licenses to hand out. So the plan is to cull the ineligible applications and then have a lottery.

A lottery is “fair” in some primitive sense – it avoids charges of favoritism – but it has no other virtue. It simply creates windfall winners and losers. Why not auction the licenses (on, say, a five-years-at-a-time basis) and capture the windfall for the state?

The next hard problem facing  the Liquor Board will be how to allocate the limited square footage of grow space. Again, I’d opt for an auction.

Footnote Bob Young quotes me accurately, but slightly out of context. When I said “What if we gave a pot legalization and nobody came?” I was worried about whether the retail stores would have anything to sell in the first year at prices competitive with the  illicit market and with the medical outlets. The decision to allow outdoor growing will, I think, make that problem go away quickly, and hasten the problem of prices low enough to encourage drug abuse, use by minors, and diversion from legal retail sale for out-of-state distribution.

Second footnote No, I’m not currently an active adviser to the Washington State process. BOTEC has completed all its assigned tasks.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

12 thoughts on “Cannabis retail licenses: lotteries v. auctions”

  1. Is there any reason supported by science why licenses to sell retail cannabis should be any more difficult to acquire than licenses to sell retail tobacco?

    1. Yeah. I accept that legalization has to go through baby steps, etc., but it seems to me that there shouldn’t be an artificial constriction on supply here. Use zoning laws and legitimate licensing requirements to control externalities, but subject to those laws, anyone who is qualified and wants to do it and can meet the requirements should get a license.

    2. It might be better to ask the questions separately, what kind of regulation ought we have for Cannabis and what kind for tobacco, rather than use one as a yardstick for the other.

      If (as I think is probably the case) it’s too easy to get a license to sell cigarettes, then by using that as a standard for cannabis, we’d be making the same mistakes.

      Better to make decisions on how to regulate pot on their own merits.

    3. I partly agree with rachelrachel, above, but I feel like I should also add that it’s quite a bit more difficult to acquire a license to sell alcohol, (at least in some states), and I’m not sure why tobacco should be the preferred analogy. In my current state, and in some areas of the last city I lived in, there are hard caps on liquor licenses.

  2. A lottery is “fair” in some primitive sense – it avoids charges of favoritism – but it has no other virtue….Why not auction the licenses …?

    I think you may be overlooking an important virtue of the lottery, or perhaps you disagree with me. The lottery prevents monopolization of this potentially lucrative business opportunity by the deepest pockets.

  3. The argument against an auction (and it may or may not be a good one) is that it changes the profile of potential vendors, culling out the satisficers and favoring those with both the resources and intent to maximize sales and profits. Depending on how the auction is structured and who is bidding, that may or may not come to pass (and the state may not care).

    The other thing is that (like college loans or LBO debt) it pre-emptively takes a big slice out of the money that would otherwise be used to start and operate the enterprise, and thus forecloses a lot of choices about business plans and growth profiles. Perhaps that’s a good idea, or perhaps the ongoing tax revenue is what the state would prefer to extract.

  4. Important question is whether these licenses are now “owned” by the winners and can be sold on the open market or whether when a business/owner leaves the market place do they revert back to the state for re assignment?

    If they are owned and can be sold definitely an auction. Failure to do so means windfall profits will go to the lottery winners and the state will forfeit the value of the licenses. It also means in the end the deep pocketed organizations/individuals/companies will own them since they will be able to out bid others when they come on the market.

    If they revert to the state for reassignment lottery is fine. The state is not giving up windfall gains if the licenses revert back to the state.

    1. The license can’t be sold. The business can be sold. So the license winds up in the hands of whoever is willing to pay the most for it. The difference is that, under the lottery, the surplus goes to the lottery winner. Under the auction, it goes to the taxpayers.

      1. Forgive my clumsy phrasing.

        You agree with the point I was trying to make. If the “license” gets tied to a business thus creating an added value then auction them off.

        Otherwise a lottery creates a windfall profit and short changes the state on the value of these licenses.

  5. The highest bidder is likely to be the same as the entity who will pay the most to acquire a license holding business. Your argument fails because Mark likely believes (as I do) that in the long run the choice between a lottery and an auction won’t produce any difference in who holds the licenses, just who collects the money for selling them.

    1. You might as well zap this since it looks like the comment I was responding to got zapped while I was posting.

  6. you auction the lic and again the man with the most money wins and the rich get richer .(getting real tired of that)

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