Centralization involves concentration power and authority at a single level. As it relates to cannabis, this means having federal government establish laws and regulations that uniformly apply across all states. In contrast, decentralization involves distributing power and authority more locally. Cannabis decentralization is what we have right now, where each state decides on its own laws and regulations.

Figure 1

Overview of Centralization vs. Decentralization

Generally speaking centralization and decentralization of policies and operations each have their benefits and costs. 

With a single point of control, centralization enables:

• Greater efficiencyand speed of implementing and enforcing laws and regulations;
• Greater consistencyacross regions, which creates stability and predictability of operations; 
• Greater controlby the centralized authority; and
• Greater economies of scaleas operations expand nationally, enabling lower per-unit costs as companies spread fixed costs across larger outputs.

At the same time, however, centralization is prone to experiencing:

• Single points of failure, especially when authorities establish the wrong standards or policies;
• Inflexibilityas national systems are less adaptable to local cultures and differences;
• Corruption or inefficiencies, since centralized authorities are not challenged by competitors; and
• Less innovationand dynamism, again, since centralized authorities and/or larger companies are not challenged by competitors.

With more distributed activities, decentralization enables:

• Greater resilience, since decentralized control isn’t predisposed to a single point of failure;
• Greater innovationand flexibility, due to smaller organizations being able to cater to local differences; 
• Greater empowermentof local participants; and
• Greater transparencyand accountability due to greater checks on power by local participants.

Yet, decentralization is prone to experiencing:

• Inefficiencyand lack of coordination, as each region does its own thing;
• Higher infrastructure costsneeded to accommodate more smaller operations as opposed to fewer larger operations;
• Inconsistenciesin laws and regulations across regions; and
• Fragmentation, due to lack of uniformity and coordination across regions.

Figure 2 summarizes the benefits and costs of centralization and decentralization.

Figure 2

Specific Considerations in Cannabis

As the potential for federal legalization of cannabis looms, so too does the double-edged sword of industry nationalization. More specifically, the federal government will surely establish some national policies that apply uniformly to all cannabis activity, while also leaving certain policies up to the individual states. At the same time, states may choose to align on certain issues while choosing to stick with their own local policies on other issues.  

Let’s consider the role that the issue of centralization vs. decentralization plays in some of the tensions currently experienced in cannabis.

Activity Licensing

Tensions surrounding how the licensing of various activities should work tends to pit those in cannabis-as-a-community group against the cannabis-as-a-business group. Those in the former group tend to advocate for small businesses, which involve greater accessibility to licenses with low application and renewal fees, caps on number of licenses and canopy sizes for any organization, and liberal home grow laws. In other words, cannabis-as-a-community advocates tend to prefer decentralization. In this case, products would be locally supplied, and thus vary from region-to-region. Of course, these policies would have to be centralized – required universally – for a small business environment to survive. 

In contrast, the activities preferred by the cannabis-as-a business group involve companies exploiting large economies of scale in operations, that is, a preference for unlimited numbers of licenses and canopy sizes, generally together with more restrictive laws on home grow activity. This scenario leads to general consolidation of the industry, that is, de facto centralization. 

In other words, the industry is split between those who would prefer more centralized activity and those who would prefer more decentralized activity. At the same time, both groups would agree that policies need to be centralized, though some prefer centralization of limited activity, while others prefer centralization of unlimited activity. 

Medical Cannabis

Those in the medical cannabis community generally support the harmonization, i.e., centralization, of medical cannabis laws and regulations. There’s general consensus that there should uniformly be: as many qualifying conditions as possible, full state reciprocity regarding recognition of licensed medical patients, low fees for getting a medical card, low taxes on purchases of medical cannabis products, and access to budtenders who are educated in cannabis and can help guide patients in their purchases and use.

Having access to educated budtenders (or other on-site consultants), especially under a centralized system, would involve some sort of education certification, which would eventually lead to the centralization of a credentialing framework. Since it’s costly to administer such a system, and since certified budtenders would command higher wages, providing medical patients (or cannabis customers in general) with access to educated budtenders would lead to higher prices of cannabis.

Also, once a patient (or consumer) finds a product that satisfies his or her needs, that consumer generally wants to be able to purchase that same product over time and space. In other words, a significant portion of cannabis consumers generally support universal availability of cannabis products. This is only possible if companies are allowed to grow to sufficient size and hold licenses across different states. In other words, there is significant demand for centralization of product supply.  

While local growers may be able to accommodate local patients in a decentralized industry, if patients cannot rely on being able to access their medicine in more distant markets, they must be able to take their medications with them when they travel, that is, they need a centralized industry. It follows that medical cannabis seems to be better suited to a centralized system than a decentralized one.

Lab Testing

Those in the cannabis market generally support the standardization, i.e., centralization, of lab testing cannabis laws and regulations. There’s general consensus that lab testing protocols should be uniformly standardized as they relate to: which substances should be included in lab testing requirements (cannabinoids, terpenes, pesticides, molds and fungi, heavy metals, residual solvents, and other toxins), protocols for quantification of those substances, and allowable limits on toxins.

Packaging/Labeling

Those in the cannabis market – especially multi-state operators (MSOs) – tend to support standardization, i.e., centralization, of cannabis packaging and labeling requirements. Common sense suggests there should be uniform reporting of cannabinoid and terpene content, while safety and transparency requires easy access to product certificates of analysis (COAs), just like all other non-cannabis products are required to be labeled with product ingredients. Also, consumer safety requires that when cannabis ratios are reported (should they always be required?), they be done consistently. Currently, there isn’t even with-in state consistency across brands, let-alone cross-state consistency: some brands report THC:CBD ratios, while others report CBD:THC.

Several states have imposed policies that either limit THC concentration in flower or tax “high” THC flower. These types of policies tend to be arbitrary – there currently is no uniform definition of what constitutes “high THC” – and they’re probably not particularly effective, since they promote gaming (i.e., evasion) of the rules. Regardless, such policies are probably less effective in decentralized regimes than they are in centralized ones, since some people in states with limits or taxes can travel to areas without such limits or taxes. Presumably most cannabis businesses and consumers prefer centralized policies without THC limits or taxation, while regulators are divided, depending on whether they prefer such policies, together with whether such policies would be adopted under a centralized regime. 

For non-flower products, the personalized nature of cannabis, together with the wide variation in consumer tolerances and needs makes, it difficult to standardize doses or package contents. At the same time, common sense and safety suggests there should be limits on the amount of THC contained in single serving products (e.g., 1 gummy, 1 square of chocolate, 1 beverage). And consumer safety suggests limiting package contents to reasonable levels, though, again, given the wide variation in consumer tolerances, it’s not clear to me what those limits should be. Finally, the FDA puts limits on purchase amounts for other controlled substances, while alcohol content is naturally limited by type (beer, wine, spirits) and container size (can or bottle), which suggests the THC content per package should probably also be limited. 

In Short

Taken together (see Figure 3), it seems that cannabis market participants tend to be divided as to the issue of whether or not licensing should limit the size of businesses, and thus be more decentralized or centralized in product offerings. Yet there seems to be a consensus that the rest of the framework for supplying cannabis, i.e., for performing lab testing, and for packaging and labeling products, should be harmonized across states. 

Figure 3

Notably, providing universal availability of cannabis products across time and space is generally inconsistent with smaller operations. That is, supporting widespread medical cannabis use would seem to be best achieved with larger, multi-state operators, who could better ensure product consistency and availability across time and space.

Interestingly, the harmonization of regulations across states creates economies of scale in cross-state operations. That is, with standardized regulations, when a state operator expands into another state, the operator’s legal and compliance costs increase by less than double. These types of economies of scale tend to lead to cross-state consolidation of operations (multi-state operators), because they enjoy cost advantages over small, single-state operators. Conversely, when regulations vary across states, then there are fewer advantages to establishing multi-state operations, in which case small businesses are better able to survive alongside larger companies. 

In short, the current environment in which regulations vary across states is probably better able to support small business operations, but less able to support a thriving medical cannabis community, than an environment with more standardized cross-state will be, as so many in the industry are advocating for.