The Economics of Legal Marijuana Markets


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In many ways, markets for legal marijuana are no different from other markets, but there is a risk that over-regulation can lead to a split market in which non-legal suppliers do not immediately disappear

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The Economics of Legal Marijuana Markets

  1. Economics for your Classroom Ed Dolan’s Econ Blog The Economics of Legal Marijuana Markets July 9, 2014 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
  2. Legal Marijuana Markets are Now a Reality  Legal markets for marijuana, long discussed as a theoretical possibility, are now a reality in the United States  Many states have legal markets for medical marijuana  In 2014, legal markets for recreational marijuana opened for business in Colorado and Washington  Several other jurisdictions, including Alaska, Oregon, and Washington, D.C. may follow  How are these markets supposed to work, and what problems are they likely to encounter? July 9, 2014 Ed Dolan’s Econ Blog
  3. The Non-Legal Market  Figure 1 shows a stylized version of the market for non-legal marijuana in a single state  The supply curve is fairly elastic, because even a small price increase will draw in supplies from other states or countries  The demand curve is less elastic, similar to inelastic demand for other recreational drugs like alcohol and tobacco  In equilibrium, 1,000 kg per month is sold at a retail price of $12 per gram July 9, 2014 Ed Dolan’s Econ Blog
  4. Intended Effects of Legalization (Supply)  Figure 2 shows the intended effects of legalization  A new supply curve, SL, represents the supply of legal marijuana  It is less elastic because (in versions of legalization tried so far) all legal marijuana must be grown in-state  However, at least for moderate quantities, costs should be lower because plants can be grown in daylight rather than artificial light, security costs for growers are less, no risk of arrest, and so on July 9, 2014 Ed Dolan’s Econ Blog
  5. Intended Effects of Legalization (Demand)  There is also a new demand curve for legal marijuana, DL  It lies to the right of the non-legal demand curve DN because:  Most user of the non-legal product will presumably patronize legal stores if the price and quality are the same or better  Some new users will be attracted when the risk of prosecution is lifted July 9, 2014 Ed Dolan’s Econ Blog
  6. Putting Non-Legal Suppliers out of Business  If the supply curve for legal marijuana is low enough and if the demand curve shifts only moderately, then legal marijuana will be cheaper than the non-legal product and non-legal suppliers will become uncompetitive  If the quality, convenience, and safety of the legal product is perceived as superior, the shift away from non- legal suppliers will happen more rapidly July 9, 2014 Ed Dolan’s Econ Blog
  7. The Risk of Over-regulation  There is a risk that over-regulation may restrict the supply of legal marijuana  For example, taxes in Washington State are high (35-40% of retail price) and approval of licenses was very slow  Also, continued illegality at the Federal level makes it hard for growers and stores to open bank accounts and conduct normal business  These and other factors can lead to a shortage of legal marijuana and the supply curve SL may intersect the demand curve at a price above the prevailing non-legal price July 9, 2014 Ed Dolan’s Econ Blog
  8. A Split Market  Over-regulation leads to a split market, as shown here, in which the majority of users buy at a lower price from their non-legal suppliers  The legal market is only able to attract a small population of new users who are willing to pay higher prices to get the legal product July 9, 2014 Ed Dolan’s Econ Blog
  9. Early Experience  Early experience in Colorado and Washington shows mixed results  A well-developed medical marijuana market in Colorado and lower taxes helped that state overcome supply problems for legal marijuana more rapidly than Washington  The non-legal market did not disappear immediately in either state, but there are signs that it will gradually wither away, just as the non-legal market for moonshine whiskey did after the end of prohibition in the 1930s. July 9, 2014 Ed Dolan’s Econ Blog
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