Demystifying the Marijuana Bust

Supply and Demand Curve

Marijuana BustMarijuana busts are organized police raids on weed growing operations, dispensaries, and users. They come at a huge cost to the lives of many. Have you ever wondered why, beyond the fact marijuana is widely used despite being illegal, the government would view this as an effective tactic? What’s more, have you considered what effect this has on the price of marijuana?

The Economic Perspective

In states where the plant has been fully legalized, deals and specials have effectively made the value of an ounce of great marijuana less than $150. If economics says the price is set by supply and demand, it stands to reason that more supply will likely produce a lesser cost. Yet, remember the supply chain (that is, how a producer delivers their goods to a consumer) was a logistical nightmare, starting more commonly in Central and South America, with criminal organizations both more politically and financially stable than in the US or Canada.

This is not a question of cultural diligence to mitigate an international drug problem; it is instead an apt example of the problems that arise when you attack a creatively destructive entity such as organized crime using penalties rather than reconciliation. Crime enforcement is part of our economy.

Marijuana Busts Target the Supply

While deterrence at the point of demand (the consumer) may seem like an effective way to police a substance, a marijuana bust is more likely to target the supplier than the people demanding it.

In his book Narconomics, Tom Wainwright, an editor for The Economist, explores how poorly an attack on the supply of a substance affects the demand in a market such as the US. Instead, it just drives the price up.

Price sensitivity is something felt by many people living in the world today. If the price of your favorite food suddenly went up by $5, you might start buying less, effectively reducing demand. The problem is that criminal supply chains aren’t as concerned with fair trading practices.

Which Suppliers Are Targeted?

Instead, you get a situation where governmental organizations who try to eradicate growing operations instead only cripple the weed farmers. This happens for two reasons. First, the areas where marijuana was grown to primarily supply US demand often lacked other viable substitutes which would sustain the same volume and profits. You just could not make as much money selling tomatoes as you can selling marijuana.

Second, when a company or organization such as a criminal organization is your main buyer and, as a business, losing them would put you under, the organization can leverage significant pressure on how much they pay for your product. Think about it like this:

We’ve all played the game Monopoly. Now picture playing the game where you can buy no real estate. What are you doing now, besides living paycheck to paycheck, crossing Go, and hoping to not go to jail? The game loses significant value when the bank does not sell real estate and knows they are in control of the market, prolonging the time the game is ultimately played and reducing the potential profits (wins) for the game players (in this case, weed farmers). So who wins?

No one… except the bank. Now you play longer for less return, since you only have the one way to achieve your goals and no other substitutions to win the game. The bank, in effect, has you cornered.

Therefore, the strategy of changing supply to affect price, in this case, may hurt the producers and not the demand or price.

Changing Dynamics of a Rising Industry

For so long, the global dynamic of acquiring the dopest dope you’ve ever smoked was held back by legal measures which had a devastating effect most concentrated in populations who were struggling to get by: making prisons full while criminal organizations and (some) governments benefited. The marijuana bust as a method of supply control doesn’t work to increase price for another reason: oversupply with an artificial price.

When I refer to an artificial price, I mean a price set under conditions that were either risky or costly. This is how many of us were introduced to buying marijuana. The consumer doesn’t have much of an effect on prices because their dealer isn’t in a position to be held accountable for quality, since the product itself is relatively scarce.

Saturating the Market

Supply and Demand CurveAs more and more states come online with medical and recreational marijuana programs, it is becoming apparent that the price set in the market is much higher than the supply would necessitate. In California, for instance, the Department of Finance estimates as much as 13.5 million pounds of marijuana is grown in the state each year and the local demand, conservatively, is between 2.2 and 2.6 million pounds per year. While this points to a huge oversupply, it also indicates a secondary market where marijuana remains illegal.

Sellers in such a market likely form their pricing based on the artificial value I have suggested due to risk, indicating it is likely priced too high for an actual, regulated market. Colorado, for instance, has not only seen the price of marijuana decrease since the recreational marijuana industry came online, the state has seen fit to capitalize on decreased sales prices by increasing the sales tax rate, increasing the value to the state while also undermining the black market.

What Can We Learn?

However, if the marijuana bust has taught us anything at all, it’s that the cost of enforcement is huge. Billions of dollars have been spent combating marijuana cultivation and use. Now that we have a legal market in some states, the prices are decreasing for the right reasons. After all, it is no longer criminal, supply has never been higher, and scarcity never lower.

Article by: Joey Wells