The “Free Market” for Marijuana: A Sober, Clear-Eyed Analysis of Marijuana Policy

Federal law prohibits the possession and sale of marijuana. At the same time, states are not only decriminalizing marijuana but also attempting to provide a regulatory apparatus for its sale. This has created a unique business environ- ment. In some ways, there is a true “free market” for marijuana in states that have legalized it—free, that is, of the legal and financial infrastructure avail- able to fully licit businesses in America. Contracts may not be enforceable because they lack a legal purpose. Relief in bankruptcy court may not be available, either as a debtor or as a creditor. Use of a legal entity to limit liability and take advantage of entity personhood may be impracticable. Federal money laundering and other laws effectively restrict access to the banking system, forcing marijuana businesses to operate as purely cash businesses. The U.S. Patent and Trademark Office refuses to register fed- eral marks related to marijuana. Marijuana businesses face challenges in ob- taining competent legal counsel to guide them through a market free on one hand and regulated on the other. The odd legal posture has implications for considering marijuana policy through an economic lens. Any analysis of marijuana externalities should con- sider the additional externalities created by that odd legal posture. An analysis of policy options for mitigating negative externalities should also factor in the additional costs for marijuana businesses due to this “free market.” The un- certainty, from a policy perspective, counsels in favor of applying heuristics when considering policy options: this Article offers three and applies each. This Article is the first to use this situation to examine the value offered by our legal and financial infrastructure. An inability to use it hurts marijuana busi- nesses in very real ways. But, nonetheless, marijuana businesses are able to operate—to thrive even. That infrastructure is both more and less valuable than is appreciated, and in surprising ways. Ultimately, this Article advocates federal action that facilitates a continued incremental, state-by-state approach to marijuana reform.