Use various microeconomic theories to analyze the effect of government regulations in a new market. In 2012, both Colorado and Washington citizens passed ballot measures allowing the production, sale and use of marijuana for recreational purposes. In both cases, the ballot measure authorized the legislatures to develop regulatory regimes, and to impose taxes to pay for the regulation. (Note: in Colorado, those taxes had to be approved by a vote of the people, and they were, in 2013.)

Use the microeconomic theory we have been studying to analyze the legal and illegal markets for marijuana in Colorado or Washington, specifically with regard to the following issues:

Will the legal market survive or thrive if the taxes cause prices to be higher than the black-market?

The impact of taxes depends critically on whether demand in the legal market price elastic or price inelastic, so use elasticity theory to explain your determination.

Remember, the law of demand says that when price rises, quantity demanded falls. Elasticity helps us to answer the next question, "how much." In what market structure do the retail marijuana establishments operate (perfect competition, monopoly, monopolistic competition, and oligopoly)?

Explain. To address this question, you will need to know a bit about the regulations that have been passed. The local newspapers (in Colorado, the Denver Post) have provided good coverage of the issue, both before the 2012 vote, and during the process of crafting the regulations.

In Colorado, information about regulation and taxation of marijuana, including this 2016 overview of Colorado marijuana regulation, can also be found by searching the web site of the Colorado General Assembly. Colorado General Assembly Why is government regulation desired or needed for this product and industry? What is might be the "misallocation of resources" without government intervention? What will be the costs of that regulation?