Henderson on Illegal Weed
As more and more state governments legalize recreational use of marijuana—14 had done so by 2021—an obvious question to ask is, will the amount of legal marijuana sold and consumed eventually exceed the amount of illegal marijuana sold and consumed? Thinking through the economics, my answer would have been yes: Make marijuana legal and the risk of producing and selling marijuana falls. Those who continue to produce illegally face the risk of prosecution and confiscation. Legal marijuana, therefore, should have an advantage in the market.
But in Can Legal Weed Win? economist and lawyer Robin Goldstein of the University of California Cannabis Economics Group and agricultural economist Daniel Sumner of the University of California, Davis answer no. They argue that the heavy regulation of legally produced marijuana gives a leg up to illegal marijuana—or, as they call it in the book, “weed.” They make their case by guiding the reader through the history of marijuana legalization and regulation, and by analyzing the basic economics of legal and illegal markets. I find their case persuasive.
This is from David R. Henderson, “Why Regulation Will Likely Keep Illegal Weed Dominant,” Regulation, Fall 2023. It’s my review of Can Legal Weed Win? The Blunt Realities of Cannabis Economics. Notice the double entendre in the subtitle. Because I wanted to focus on the serious content, I passed up a number of opportunities to highlight their clever humor.
Another excerpt, my favorite:
One person who did not reckon with the raft of regulations that would come with Prop 64 was Sabrina Fendrick of the National Organization for the Reform of Marijuana Laws (NORML). Goldstein and Sumner have a chapter titled “Sabrina’s Story,” in which Fendrick says she knew how to think about criminal justice while at NORML but later “realized how little I knew as an activist about how hard it is to operate a cannabis business.” In an interview with Goldstein, Fendrick lamented, “I wish I had been more critical and engaged in the drafting” of Prop 64.
Call this Fendrick’s “George McGovern moment.” McGovern, a U.S. senator from South Dakota between 1963 and 1981 and the Democratic candidate for president who ran against Richard Nixon in 1972, was on the left end of the Democratic spectrum. Not surprisingly, given his views, he was not sympathetic to the travails that business people experienced, both in running a business successfully and in dealing with government regulation and taxes. McGovern learned the hard way. A few years after leaving the Senate, he bought and operated a 150-room inn in Stratford, CT. In a 1992 op-ed in the Wall Street Journal, McGovern wrote that he wished he had had this first-hand experience while he was in Washington because “that knowledge would have made me a better U.S. senator and a more understanding presidential contender.” Similarly, Fendrick stated: “I hadn’t actually realized how [legal] language can completely change how a business operates. Sometimes for good, sometimes for bad.”
I especially liked Goldstein’s and Sumner’s use of the elasticity of demand to explain why they think the market for weed, measured by total revenue, will be much smaller than many others predict. Indeed, I would recommend that section to people teaching undergrads and wanting a reading that nicely applies the concept of elasticity in a way that would interest undergrads.
By the way, both authors contacted me to thank me for my review and to give the details of what they liked. You might be surprised that I mention this, but I rarely get an email from authors whose books I review, even when I am largely positive, as I was on this book.
Read the whole thing.