Last week I blogged about Baptists and Stoners, and the public choice implications of legalizing pot.
Reuters has an excellent Special Report discussing the legalization of growing marijuana in Oakland, and explores some of these public choice concepts in more details.
First, we have more on the rent-seeking force behind this new legislation.
Jeff Wilcox, a middle-aged, clean-cut man who dresses in the Bay Area casual business attire of clean jeans, collared shirt and running shoes, may be the face of Marijuana, Inc, the corporatization of cannabis.
He has just persuaded Oakland to legalize industrial-sized marijuana farms, touting a study that promised millions in city taxes and hundreds of high-paying union jobs.
Second, we see a perfect illustration of specialization of labor, and equalization of prices in a market based on supply and demand for different types of pot.
“The new Two Buck Chuck will be $40 an ounce pot,” Wilcox said in an interview, looking forward to a day of full legalization. Boutique growers could produce the high-end stuff in their “gardens,” he explained, while he supplied the masses with a clean, controlled, great-value product.
Economists see a different picture — a multibillion dollar market about to be unfettered with little sense of how consumers will react. Two rules they expect to apply: competition will lower prices and expand the market; businesses will look for ways to get ahead of the pack.
Third, the pot growers are going to start competing with Mexican drug cartels. Baptists and Bootlegers suggests that the Cartels will almost certainly try to stop this new market, or in the alternative try to obtain those coveted dispensary licenses.
One recent study predicted California marijuana would underprice high-quality Mexican imports in virtually every city in the United States, even including the costs of smuggling and state taxes.
The reaction of drug cartels behind vast imports into the United States is anybody’s guess, from abandoning the field to doubling down in a legal market where they can plow profits into political campaigns for legitimate allies.
But fear of the effects of legal California ‘bud’ already has made its way to the streets of Tijuana, the Mexican sister city to San Diego and a major gateway of drugs into the United States. “We’re screwed,” said Juan V., a street dealer in the grimy border city of around 2 million people. “They are going to want us to lower prices,” he said. “We’ll just have to sell more here.”
In fact, the cartels may hang a shingle and try to obtain permits to sell it legally:
The response of Mexican cartels could be the most significant issue for California, which hopes to drive illegal drug operators out of business. The drug industry source from Los Angeles sees organized crime throughout the marijuana trade in southern California. They grow in the mountains, but they also search the cities for independents. “Once they find out who you are, they will tax you,” said the source, miming putting a gun to a head. He was skeptical that legalization would change the industry.
If done poorly, legalization may simply invite them to put down roots, say law enforcement personnel, who fear the Mexican mafia will take the hit to profits, go legitimate and start supporting political candidates who back their causes.
“The cartels already have the supply lines. They already have the business, they already have the product. The only thing you are going to do is give the cartels a legal drug to sell,” said LA Sheriff’s Department’s Walsh.
Fourth, we also have some interstate commerce/Gonzales v. Raich type issues here, as the article notes that the pot likely will not stay within the state. I wonder if the Feds will clamp down here?
If California legalizes marijuana, the rest of the nation may well follow. One way or the other, cut rate, highly potent California weed is unlikely to stop at the state’s borders.
The U.S. state that first allowed sales of medicinal marijuana, in 1996, may take away all restrictions on adult use of the drug in a November vote, giving local governments the option to regulate sales and growing of marijuana.
The magnitude of the experiment is difficult to fathom — the world’s eighth largest economy will tear down barriers to the most used illegal drug in the United States. The state that invented car culture will have open freeways to take the bounty to the rest of the nation, where higher prices — and the risk of handcuffs — beckon.
This article actually suggests California could start exporting marijuana to other states.
But there is one way, Rand found, for California to boost tax revenue substantially: exports. “California could actually make a lot of money from taxing marijuana and then exporting it to other states,” said study author Beau Kilmer.
Using publicly available prices of marijuana throughout the United States, researchers imputed the costs of smuggling and calculated that high-quality California marijuana, even at taxed prices, could undercut current prices of comparable pot in 42 of 48 continental U.S. states, even with the $50 per ounce tax that Pacula calculates would create a black market. Six times as many marijuana users are outside California as in the state, Rand quoted federal studies as showing.
One industry source, who is still involved in illicit drug circles and requested to remain anonymous, said he recalls prices falling in Los Angeles as medical marijuana dispensaries exploded there. Early on in his career, high quality marijuana went for $6,000 to $7,000 a pound. “Now you are getting $3,500. What’s going to happen when you legalize? You are going to take it a couple of states (east),” he said. Growers and vendors with expensive taste would not be able to continue to lead the high life at legal prices, he said.
I wonder how long DOJ will stand by idly. They asked the US Drug Czar for comment:
Also, not everyone buys the theory that California will become a rogue drug state that can undermine national efforts to put a lid on marijuana. The free market is pitting different cities eager for marijuana revenues against one another, and small growers at the Oakland council meeting threatened to leave the city if taxes were too high.
U.S. drug czar Gil Kerlikowske, director of the Office of National Drug Control Policy, in an interview cast cold water on California export potential. “I quite frankly don’t see that,” he said. “I just don’t see it as being something that suddenly people in Kentucky say, ‘Ah now marijuana can be shipped in from California.'”
Fifth, we see that the state will profit quite heavily on the production of this new market.
Wilcox’s plan includes a 7-acre site with a 100,000-square-foot growing space, a bakery, a testing lab, job training and growing equipment production at the site — which would need to win one of the four Oakland permits to go into business. If it did, it would produce 58 pounds of cannabis a day at wholesale prices of $2,500 to $3,000 per pound and send the city more than $2 million per year in taxes if a 3 percent growers’ tax were initiated.
But Oakland could complicate his math. The city is considering an 8 percent tax on cannabis farms, more than double the top rate in Wilcox’s economic analysis.
The prospect of a sin tax on a culturally acceptable drug has been gaining advocates for years. A bill in the state legislature would legalize pot, charge $50 an ounce tax and, according to state accountants, bring in $1.4 billion per year.
A more likely path to legalization, though, is Proposition 19, the brainchild of the Tax Cannabis movement, which would let local governments decide whether and how to regulate sales and cultivation of marijuana and would let anyone in the state 21 years or older use it.
A just-released study by the independent state Legislative Analyst’s Office says that Proposition 19 could raise hundreds of millions of dollars over time.
Sixth, as one could expect, when the government taxes something, people find ways to get around it. You’ve heard of the Laffer Curve. Call this the Laffy Taffy Curve. As taxes go up, Stoners will go galt and find ways of avoiding it. Thus, a black, or in this case a purple (?) market is created.
California may be overly optimistic, according to a new Rand Corporation study. By the time taxes are high enough to produce the billions that California wants, they will have created a thriving black market. “So now you have the dual evils, lower prices and still a black market to deal with,” researcher Rosalie Liccardo Pacula said, referring to the $50 an ounce charge.
If marijuana were legalized, Rand projects the price of high-quality marijuana to fall to as little as a tenth of current levels and says that usage could more than double as consumers respond to cheaper prices. A single joint, which at today’s potency is enough to get a single person high a couple of times, would cost $1.50, even taxed at $50 per ounce.
More than half of that cost would be the tax, though, and as the novelty of legalized pot wore off, consumers who at first found a $1.50 joint a rock-bottom deal, might start to see it as a rip-off. The same joint could be had, untaxed, for half price on a street corner. “As time goes on, the black market prices will look more appealing,” said Pacula.
Absolutely fascinating. I love capitalism.
H/T Sentencing Blog