MONEY

Price War Heats Up Between Legal Marijuana and the Black Market

KRYSTAL KLACSAN uses a hole punch on the laminated badges for VIP's and members of the press at Cannabis City
After an initial surge following legalization, Colorado's dispensaries have gradually lowered prices. Brian Cahn—ZUMA Press

Recreational marijuana went on sale legally for the first time in Washington state Tuesday, and early reports indicate it’s not cheap to be an early adopter.

The New York Times reports that a combination of tough regulations, financing troubles, meticulous inspectors, and tight land-use laws have severely slowed the rollout of recreational marijuana dispensaries. Of the 334 vendor licensees authorized for the first wave of stores, only about 20 have actually been granted.

A shortage of stores meeting an avalanche of new demand adds up to high prices for the state’s first recreational pot consumers. According to the Times, an ounce is expected to sell for at least $400. Based on numbers from PriceOfWeed.com, a site that crowdsources national marijuana prices, that’s over twice as much as Washington’s black market consumers pay for an ounce of average quality pot.

If one point of marijuana legalization is to stamp out the unregulated black market, and thus avoid funding drug cartels that cause larger societal harms, sky-high prices for legal marijuana are a serious concern. Most consumers would prefer to purchase dope legally, but the corner dealer might be tempting if he’s selling at half price.

Can legal marijuana compete on price with the black market? Colorado, which legalized recreational marijuana in January, is a the best case study available. There, in the early going, legal pot prices matched those of Washington’s new dispensaries. Medicine Man, a recreational marijuana shop in north Denver, started out selling marijuana for around $450 an ounce, including tax. “The first couple of months there was literally a line out the door, so we could make that profit,” says Kala Williams, the store’s receptionist and daughter of its owner.

But prices soon dropped as more retailers opened shop. At least half a dozen recreational shops operate within five miles of Medicine Man, which has lowered prices to compete. It now sells a range of marijuana strains for between $198 to $340 per ounce, plus tax. Similarly, an analysis by FiveThirtyEight in late April, about four months after recreational marijuana shops opened, revealed the median sticker price for an ounce of recreational weed in Denver to be $200. After adding Denver’s 7.72% sales tax (most marijuana shops are located in Denver), a 10% marijuana state tax, and an additional 3.5% Denver city tax, a $200 ounce would cost about $242 out the door. Checking store menus online, $200 seems on the low end of the price spectrum, but we had no trouble finding stores offering an ounce for about $300, including tax.

Gauging how these prices compare to the black market is difficult: Street prices vary widely; it’s hard to poll a large sample size; quality is difficult to account for; and drug dealers don’t send out earnings reports. But based on the limited information available, legal weed appears to cost more — but not a lot more — than its black market equivalent. Two Denver residents with knowledge of street prices say contraband pot tends to range from $160 to about $300 an ounce. That roughly correlates with PriceOfWeed’s numbers. If those figures are correct, legal marijuana in Colorado is priced in the upper end of the illegal market.

Whether or not legal marijuana currently competes on price, UCLA’s Mark Kleiman believes it definitely will in the future. A professor of public policy at the Luskin School of Public Affairs, Kleiman says legal weed dealers have one thing the illegal market can never have: The ability to openly invest on machines and other labor-saving technologies that can build economies of scale. “If you have to hide, you have to pay premium wages because people risk going to prison,” said Kleiman. “You can’t invest in expensive fixed tech because you’re worried about a raid.” For example, one of the biggest costs for the illegal drug market is hand trimming the plant’s buds, a process that can be done far more cheaply with machines. Kleiman also believes street dealers will be driven out as concentrates and edibles—marijuana embedded in food—become more popular, as these products are even more difficult to produce without expensive equipment.

His one caveat is that states could end up restricting the amount of land licensed for marijuana production to the point where supply cannot meet demand. That would keep prices permanently inflated, and give street dealers an edge.

That aside, in the long run Kleiman thinks the days of black market pot will soon be over in states where recreational weed is legal, even if prices remain high: “I think illegally growing marijuana in those states will become as common as illegally brewing whiskey.”

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