It is the summer of 2014 and the legalization snowball continues to roll down the marijuana slope; it has been picking up speed for the past six months as Colorado and Washington have legalized the plant. Furthermore, since 1996, 23 states have changed their laws to allow medical marijuana. Still, cannabis is illegal at the federal level, not to mention illegal at the state level for a majority of states. One point of intrigue is how legalization affects black market pricing in the United States, which is still the number one source of weed for the majority of Americans.
“The global war on drugs has failed, with devastating consequences for individuals and societies around the world,” according to Clifford Thies, as quoted from a 2011 report from the United Nations Global Commission on Drugs. Thies concludes that marijuana prohibition policies are not unlike the laws that benefited the “bootleggers and Baptists” of the alcohol prohibition era. That is to say that while law enforcement and people concerned with moral judgment are happy that marijuana is prohibited, the black market cannabis producers also revel in its extra-legal status, as it allows them to keep the bootleg price high.
In “Alchian and Allen Revisited: Law Enforcement and the Price of Weed” from the December 2013 issue of Atlantic Economic Journal, Robert Lawson and Todd Nesbit gave the example of California’s Proposition 19 from 2010 to show that illegal cannabis producers prefer the plant’s illegal status. In a tri-county area of California known as the “Emerald Triangle,” which the authors say is “dependent on the marijuana crop,” the three counties voted against legalization in order to preserve the black market for their investment in crop production.
The Alchian-Allen theorem says that placing a fee or cost on a good alters all prices in a relative way so as to encourage consumers to seek the higher-quality versions of the good. Lawson and Nesbit stated that this is clearly the case with marijuana. To demonstrate the Alchian-Allen theorem, Lawson and Nesbit offered the following example: by adding the cost of travel, college football fans are more likely to buy better seats at the game the farther they travel to the stadium.
Since marijuana is illegal, Lawson and Nesbit, as well as Associate Professor Joshua C. Hall and law clerk Roland Malivert, have highlighted the problem with capturing data regarding prices, supply and demand, and how product quality shifts in relation to them. For prices, their studies relied on the website www.priceofweed.com. According to Malivert and Hall, the most expensive state is Mississippi, where an ounce of weed costs $475, and the least expensive state was Oregon, where an ounce only commands $259 on the black market.
Mississippi has strict enforcement policies regarding marijuana, while Oregon has decriminalized it, and legalized cannabis for medical purposes. These examples highlight Malivert and Hall’s conclusion, that by legalizing medical marijuana, these consumers moved over to a legitimate market, thus lowering demand on the black market, which in turn lowered the price of illegal marijuana.
Other interesting items to note are that while medical marijuana laws negatively affected the price of weed in the bootleg market, Malivert and Hall’s study also tied the percentage of voters in a state who voted Republican in the 2008 presidential election to lower costs in weed. Moreover, higher educated populations tended to have higher priced bootleg bud.
Not everyone concluded that marijuana legalization leads to lower prices on the black market. Scholars Frank J. Chaloupka, Michael Grossman, Beau Kilmer and Rosalie Pacula wrote a report in 2010 that said by legalizing marijuana, the demand will increase, and so will the price on the black market. The report characterized the general circumstances surrounding black market marijuana transactions and put them in sharp contrast with more illicit substances such as heroin and cocaine. According to the report, most marijuana purchases occurred indoors, and were overwhelmingly purchased from a friend of the user.
In spite of that, Thies’ conclusion that the price of marijuana is higher in states with stricter law enforcement makes the most sense. He argues that the best thing for states to do would be to legalize and set in place taxes to control the price, thus controlling the demand. Overall, more evidence points to lower prices of high-quality weed from the black market when there is less of a threat to the consumer.
While the focus has moved from the consumer to the black market suppliers, the cost of the threats posed by an illegal market are still there. Ultimately, to know how less stringent drug enforcement policies will affect prices in marijuana’s black market, there will need to be more study of the supply and demand of marijuana, as well as how that is affected by product quality.