While this is certainly a subject I’ve addressed before – multiple times – the task of education is never quite done, especially in the age of the Internet. Many still see the illegal market for cannabis as something that is just going to melt away because marijuana is legal in some places for some people. But marijuana legalization itself will not eliminate the black market; it simply allows the opportunity for circumstances to be created that will decimate the black market from an economic point of view.
For illegal dealers, the legal market represents competition. Right now, the competition is not that formidable as the legal market suffers from a myriad of problems like restricted supply, inflated prices and confusion over a patchwork of laws that change from state to state and sometimes city to city. In retail terms, think of the black market as Wal-Mart and the legal market as an up-and-coming retailer that has a few dozen stores in a few states. Judging just by the current circumstances, it’s easy to see that Wal-Mart is crushing its smaller competitor. But there was a time in the U.S. when Sears was the dominant retailer and Wal-Mart didn’t exist, which is to say, things are always changing in the marketplace – no matter what the industry.
What can a smaller competitor do to undercut a larger one? Many things, and when talking about the legal marijuana market versus the illegal one, something else comes into play: legal marijuana has the natural advantage of, well, being legal. If Wal-Mart was outlawed tomorrow, that smaller retailer would stand to benefit greatly.
So what does the legal market need to do to compete? The short answer is as much as lawmakers and politicians will allow them to do. Less restrictions and regulations and lower taxes will certainly go a long way toward lowering prices for legal businesses and helping them compete with the un-taxed illegal market. But nothing puts more downward pressure on prices than increased supply.
We have seen this concept in action in states like Colorado and Oregon. Increased supply – as in more places to buy legal marijuana in more locations and a better variety of products – will lower prices and do more to drive illegal dealers out of business than prohibition could ever hope to.
Currently, illegal dealers still have the advantage and they know it. They have had a huge head start in building a customer base, they have the best prices and – thanks to advancements in growing techniques and technology – the variety of products available on the black market is expanding.
But the legal industry is just getting started. How many legal growers and retailers will be in operation in the U.S. in five years? In ten?
Exponential growth in the legal supply will drive prices down, eventually undercutting most illegal dealers in operation. The black market will likely never be completely eliminated, but once a legal industry is fully functioning and holds 90%+ of the total cannabis market share, who will really care?