As some of you may know, a number of states have legalized the sale and use of marijuana for general (that is, non-medicinal) purposes. For your weekend reading pleasure, I give you a theoretical and empirical assessments of what has happened since the votes were counted. First up is EconoMonitor‘s Ed Dolan, who diagnoses the mystery of the missing marijuana in his home state of Washington, complete with some tasty supply & demand diagrams. Dolan sees “government failure in the making”, as overzealous licensing requirements and prohibitive taxes work together to keep the market thin.
A little-ways east, however, the Colorado market has been blossoming, and there are some early empirical assessments of the results (see here for the story and here for the report). Is it not surprising that actual demand is 30-90% higher than the “experts” projected? Tough to say. Paging through the report, I see that 20% of the users account for roughly 70% of total demand, a familiar phenomenon. Taking that a step further, there are approximately 175,000 adults who smoke 21+ times per month, and these folks on average consume more “per time” than the less dedicated users (a lot more, it turns out).
As I gear up for (count ’em) two environmental studies courses next term, I turn to Mother Jones for inspiration. And she delivers an extraordinary feature article on the environmental and energy implications of marijuana production. I can’t speak to the merits or accuracy of the article’s contentions, but I was struck by this bewildering assertion:
My guess is that, like most crop farming, marijuana cultivation would use a lot less energy per unit output if it was grown at scale. Indeed, it’s kind of hard to imagine that any indoor growing would be efficient at $0.15 kWh.
Even so, nine percent of electricity use seems incredibly high.
Continuing our series of posts about what economists believe, my colleague reminds me of the list at the beginning of Deidre McCloskey’s text, The Applied Theory of Price, available free for download!
Here’s McCloskey in all her rhetorical glory:
Considering the obstacles, economists agree about a surprisingly large number of things. Their agreements, in fact, are often about things that noneconomists would think silly or wrong or even evil. That is, economists are in surprising agreement about surprising statements…
The list of surprising agreements is a long one. Most of the 20,000 or so members of the American Economic Association would answer yes to questions such as:
If gasoline is taxed to conserve energy, will the quantity consumed go down by a nontrivial amount, despite the protestations of drivers that they cannot do less than the amount they are now consuming?
Was the rise in the standard of living of the American worker over the last 50 years chiefly a result of better knowledge and more machines rather than of activity by trade unions?
Is the American Medical Association, far from being a benevolent organization set on improving medical care, in fact a monopolistic trade union like the plumbers, longshoreman, and electricians?
Does the resting place of the burden of the social security tax depend exclusively on how workers and employers react to a change in wages, and not at all on the legal division of the tax (paid half by workers, half by employers)?
Is there an optimal amount, greater than none, of polluted air and water, noisy streets and airports, and ruined countrysides?
Although the text was written more than thirty years ago (!), the policy issues still seem rather germane — the burden of social security taxes, energy conservation, rising standards of living. I like the bit about the longshoreman.
McCloskey does not weigh in here on drug legalization, but my guess is that she would argue that economists would agree on certain aspects. First, decriminalization or legalization would definitely lead to more drug use, due to both supply and demand increases. Second, the level of violence associated with organized crime and others would decrease. What there appears to be no consensus on in whether the goods outweigh the bads, or if the distributive implications are desirable, or even whether we want to be a society that “endorses” drug use.
That, my friend, is the classic positive v. normative distinction.
A random survey of professional economists suggests that the majority supports reform of drug policy in the direction of decriminalization. A survey of professional economists who have published on the subject of drug prohibition and expressed a policy judgment indicates an even greater consensus which is critical of prohibition and supportive of policy reforms in the direction of decriminalization, and to a lesser extent, legalization.
Thorton concludes that there is in fact no consensus, and after taking a look at his summary statistics, I’d have to agree. That said, it does appear that there is solid support for some form of liberalization.
You can check the article to see some snippets from “vital” economists such as Robert Barro, Gary Becker, David Henderson, Jeffery Miron, and William Niskanen.
It is a good couple of weeks for those interested in the economics of (and innovation in) illicit drug markets. First, HBO started up its mega super miniseries, Boardwalk Empire, about how an Atlantic City official built an organized crime empire following the enactment of the 22nd amendment prohibiting the production and sale of alcohol.
Competition is on my mind. How do firms compete? By price? Quality? Product differentiation? Threatening potential entrants with physical violence? All good questions.
But if we just stick to price competition, how much price variation is there across markets? And why? Monday at the Econ TeaBA, we heard from a savvy young entrepreneurial type who claimed to be able to exploit exchange rate differences by selling used American stuff to Canadian customers. Wow!
Of course, that whole enterprise sounded pretty idiosyncratic, so it is not entirely surprising that the law of one price didn’t seem to apply. But what about in markets where the product quality is fairly homogeneous and there are limited barriers to entry. Say, for instance, marijuana.
As most of you know, the US and most of the rest of the world restricts production and sale of most drugs, including marijuana, or “weed,” as it is sometimes called (among other terms). But my understanding is that even the threat of legal sanctions, fines, and even prison do not eliminate don’t stop a robust trade. Indeed, in his “Dear Undercover Economist” column, Tim Harford takes on this unusual question:
I have been a client of weed dealers in North America since the mid-1980s and no matter who the vendor, the price has remained $10 a gramme. I don’t think anything in 25 years has stayed fixed in price like weed has.
Dealers might have some power to increase prices, as it’s illegal, and there are some significant barriers to entry, such as getting arrested. But if I don’t like the prices, it’s pretty easy to grow some on my own, because it “grows like a weed”, even if it might not be as good as the dealer’s Cannabis sativa.
So how did we end up at $10 a gramme?
Dude, that is a puzzle, indeed. My first response is supply (a.k.a., “more weed”) would keep the real price from falling, but that doesn’t affect what economists call the “price stickiness” question. That is, why $10?
On the other hand, I have to wonder who Sebastian’s source is, as this past week, I was alerted to a site that tracks prices of various quality marijuana, www.priceofweed.com. The site stratifies prices based on self-reported quality, and also logs the amount of the purchase (lots of bulk discounts, of course). average price of a high-quality ounce of weed is listed as north of $400 here in America’s dairyland. The site legend of US prices suggests that Wisconsin marijuana is the pricey side. The site also contains information about “social acceptance” and “law enforcement.” So, one might expect some relationship between price, levels of enforcement, amount and quality.
A site that launched a thousand econometrics projects. Excellent.
ANYONE who thinks it would be easy to get rich selling marijuana in a state where it’s legal should spend an hour with Ravi Respeto, manager of the Farmacy, an upscale dispensary here that offers Strawberry Haze, Hawaiian Skunk and other strains of Cannabis sativa at up to $16 a gram.
The illicit drug market seems to me to be an excellent place to think about the nature of markets and competition (e.g., how much does it dampen demand? How do suppliers emerge and compete? What is the effect of a major bust on industry-wide prices and profits?). And, as we all know, many of those folks make very tall dollars.
But what what would if those drugs were suddenly legal? As the above quotation, taken from a New York Times article on medical marijuana in Colorado, suggests, competition has a funny way of making it hard to make money. So, I suspect that liberalization of drug laws will make for a fascinating route to explore market processes, including the role of innovation and entrepreneurship in these markets. There is also a an excellent piece from The New Yorker on “how medical marijuana is transforming the pot industry” in California.
We’ll be on the lookout for how this all shakes out.