Only Economics Can Defeat the Black Market

Only Economics Can Defeat the Black Market

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Before we begin, let’s make one thing clear: there will always be a black market for marijuana. Alcohol is legal, yet there are still those who make their own illegally. Cigarettes are legal, yet there are still places where you can buy them on the street and avoid the tax levied on legal tobacco products.

As long as some part of the cannabis industry remains illegal, someone will be there to take advantage of the inflated profits that come from selling an illegal substance. And as long as legal marijuana remains much more expensive than illegal marijuana, the black market for cannabis will remain and even thrive. No laws can change this, any more than the laws against marijuana have wiped out marijuana use.

“[A] recent story by the Southern California News Group highlights a more pressing issue,” The San Diego Union-Tribune Editorial Board said in a recent op-ed. “It cited evidence that ‘the illicit side of the weed business is only growing stronger’ in California because illegal sales and cultivation are so much cheaper and have so few hassles compared with legal sales and cultivation.”

Much has been made of the high taxes and burdensome regulations suffered by legal cannabis businesses in California. I’ve remarked on the subject several times, most recently in my review of the Netflix docuseries “Murder Mountain.”

California is a perfect example of how to fail at under-cutting the black market. Legal marijuana businesses are in competition with each other obviously, but their main competition are illegal dealers and unlicensed dispensaries who are free from costly compliance and whose products are free from high taxes. The result is much lower prices from those dealers and dispensaries.

No law will stop illegal dealers, as the histories of alcohol and drug prohibition have taught us. Only economics can do that. If legal cannabis businesses can offer better products at lower prices, they can crush the illegal market. All things being equal, cannabis consumers would rather buy from a legal shop.

I understand this may not be a popular thing to say in some quarters in this day and age, but here it goes anyway: the only way to drive illegal dealers out of business is to lower prices – and the only ways to lower prices are to increase supply and lower taxes. Restrictions and regulations must be stripped down so that the maximum amount of businesses the market will hold can come into being. Taxes that inflate the price of cannabis products must be lowered.

The greater variety and safer buying experience that legal businesses can offer are natural advantages over the black market, but unless legal businesses can compete when it comes to price, those other advantages will never be enough to shrink the illegal market.

1 COMMENT

  1. So you are paving the way by providing a (weak) rationale for corporatization of legal cannabis. No mom and pop can stay in business with low prices, even with relaxed regulations, which are unlikely in a period where localities are in debt and hurting financially. There is a growing sentiment for decriminalization and not legalization and this is much better than being a corporate cannabis cheerleader like Joe Klare.

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