Background to the question Over the past few years some states in the United States have begun to legalize marijuana, while other states have not. In addition to legalizing marijuana, some states, suc...

Question

Question

Background to the question Over the past few years some states in the United States have begun to legalize marijuana, while other states have not. In addition to legalizing marijuana, some states, suc...

Background to the question

Over the past few years some states in the United States have begun to legalize marijuana, while other states have not. In addition to legalizing marijuana, some states, such as California have introduced a tax on all marijuana products.

QUESTION

You are hired as an economic consultant by a state government that would like to analyse the impact of legalization of marijuana, taking account of different potential market structures. In your answer you should use appropriate models (and diagrams) studied in class.

Assume for now that the marijuana market is a single-price monopoly where market demand is linear and downward-sloping and the suppliers’ marginal cost is upward sloping.

2. This question is about market structure. (3 marks)

a. Before legalization, we described the market as a monopoly. Justify this assumption.

b. How might legalization change the market structure of marijuana? That is, before legalization, the market was described as monopoly, but how will this change with legalization and why?

business economics

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Answer 1

Answer #1

Ans

1 Because there is only firm in the market and demand curve is downward sloping as in monopoly. In perfect competition we have many sellers and demand curve is horizontal. See fig

2 It will now become monopolistic competition since there will now be many firms in the market who offer differentiated services, different locations etc

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Answer 2

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