Is The Rocky Mountain High A Win-Win?

He’s back.  Rumors of Judge Richard Kopf’s blog being deader than Generalissimo Francisco Franco turn out to be somewhat exaggerated.  I say “somewhat” because the judge’s health isn’t all it should be, but all expectations are that he will be back to sentencing in no time, and I wish him a speedy and full recovery.

That said, it hasn’t stopped the judge from issuing a challenge, though it was to Doug Berman rather than me.  But with some gentle criminal defense lawyer persuasion, the judge was kind enough to let me play too.  Or as he said, “game on?”

His doc was from Denver, and the judge has cancer, which naturally led to a discussion about Colorado’s legalization of marijuana.

[W]e had a fascinating discussion about legalizing marijuana in Colorado and some of the unintended consequences of Colorado’s idiotic (my view) pot policy.

The doc told me that in Colorado the “black” market for weed remains strong.  Pot heads go to the local “dispensary” and buy the legal pot. In turn, they get a receipt that proves the weed is legal.  After that, they buy illegal, but high-grade, dope on the streets at far cheaper prices than can be obtained from the regulated dispensaries.  The stoner carries the receipt from the previous purchase of legal pot to fake out the police regarding the illicit pot purchase.

No doubt he meant “pot heads” and “stoner” in the most complimentary way, as would any Article III judge.  With this background, he posits the question:

Could it be that the new legal regime in the Rocky Mountains is a “win-win” for both the cartels and the State of Colorado?

Initially, the “facts” are a bit deficient in some respects to formulate a response. Is the price of pot on the street the same as it was before legalization? Is pot still profitable at all? And if so, is the price sufficiently profitable to make the risk of arrest worthwhile?

While Colorado has legalized the recreational use of marijuana, it has done so through a highly regulated regime, resulting in the cost of marijuana through legal outlets being higher than the cost of pot on the street corner. From all reports, it’s bringing in a ton of money to the state in taxes, and the legal purveyors aren’t suffering too badly either.  It would be a mistake to ignore that the state is also a player in this game, enjoying the benefits of another taxed sin.

But it’s a cute game to make a legal buy at high prices, carry the receipt around to prove the source of pot, and then get refills on the street corner at a better price.  Didn’t they see this coming?

Yet, if the street dealers aren’t getting the price pot once commanded, then they are not quite winning here. The pot that once afforded a decent lifestyle may not be subsistence.  Of course, the flip side is that legal pot sellers are now subject to the same rules of business as any other seller of consumer goods, and need to find the price point that maximizes their profit.  If they are losing sales to the street, then the price of legal pot will go down until it finds its proper level.

There are other variables here that remain unknown. Are the legal pot sellers selling out, despite high prices, so that they aren’t being affected by competition?  After all, they can only sell weed from licensed and regulated growers, and the cash crop may not be enough to satisfy demand.  If supply fails to meet demand, then the street makes up the difference.

It would come as no surprise that government regulation imposes a burden on those who comply that increases their costs, reduces their supply and makes their life generally miserable. Whenever costs are artificially high and supply is low, a black market is bound to grow to fill the void.  The existence of that black market isn’t necessarily a win, given that the street sellers were making good money before, but perhaps better described as not nearly as much of a “lose” as it could have been.  That’s the state’s choice in how its regulation impacts the supply side.

But Judge Kopf’s question goes to cartels, rather than kids on street corners.  As the suppliers of unregulated pot, are they winners here too?  The answer seems clearly that they are not.  First, the demand that was once entirely theirs is now shared with the legal pot growers and sellers.  The creation of lawful competition undermines their market share, and it’s never a good thing to lose market share. That’s profit going elsewhere.

Second, the cartels controlled the price of their marijuana, able to sell it at whatever price the market will bear.  Now that there is legal competition, it’s the legit competitors who fix the market price. In order for unregulated pot to survive, it has to be priced below the legitimate competition. Downward pressure on the price of pot isn’t a good thing either.

Third, not only must the cartels sell marijuana for a price that undercuts the price of legit dealers, but it must also be priced at an amount that makes the risk of purchasing unregulated weed worthwhile.  There is a cost to buying on the street corner, given that it remains illegal to buy outside of the regulatory regime.  The difference in price of lawful pot and unlawful pot has to be large enough to justify taking the risk to the buyer.  This adds another layer of downward pricing pressure on the cartels’ product.

Fourth, the cartels also need boots on the street to sell pot to the locals, and they have to price their wholesale product at a level that allows the street seller to make some money as well.  The street seller takes the risk of arrest, and if it’s not worthwhile selling unlawful pot in the face of that risk, why bother? Yet another layer of downward pricing pressure on the cartels.

And finally, though Colorado (and Washington State) may have legalized the sale of recreational pot, others have yet to do so.  Why then would the cartels waste much effort in moving their product to these states when there are plenty of others where they have no competition, no downward pricing pressures and plenty of demand?  This suggests that it would be foolish for the cartels to waste their product in markets with competition when there are plenty of other markets to exploit where they are the only game in town.

That legalized recreational pot has yet to eliminate the existence of street corner pot sellers isn’t a surprise. It’s going to take a while for the legal industry to get its bearings, find the optimal price point, sufficiently increase supply to reduce costs and expand its reach to the point where it’s sufficiently profitable and yet competitive with buyers such that it displaces the competition.

Is it possible that regulations will make this difficult, if not impossible, to accomplish? Sure. Never underestimate the ability of governmental involvement to screw up a good thing. Look at Off Track Betting, for example, where the government was the only entity in the history of man to make betting unprofitable.  But legal marijuana sales are being run by entrepreneurs, rather than the government itself, and people are remarkably effective at finding ways to make business work.

In time, the legal pot industry will displace the street corner dealers, which in turn will make the cartels’ products unnecessary.  Without excess regulation, it would happen quicker. With regulation, it will take a bit longer, but it will eventually happen, when the price equalizes and the differential, necessary to justify the risk, dissipates.

And the hope that legalized marijuana will bring about the end of the cartels, of a hugely profitable criminal industry in marijuana, will be realized. How quickly will be up to the regulators, but it will happen eventually anyway.

I wonder how Doug Berman will answer the question?

20 comments on “Is The Rocky Mountain High A Win-Win?

      1. N

        Perhaps I read the judge’s post wrong, but I understood it to be that the doctor alleges that this is occurring. If so, before we get to your analysis, I would really like to know if there is a documented case of a pot head/stoner/hippy/beatnik/jazz musician attempting to pass off cheaper but stronger illegal weed as weed legally purchased. Otherwise, it seems to me that this is the sort of just-so story that drug warriors often use.

        1. SHG Post author

          The nature of the internet is that we don’t get to chat third-hand with the individual sources of stories. So asking me if the doc has proof is rather pointless. Whether it’s a fabrication, an urban myth, whatever, however, it still raises an interesting question (that’s hardly outside the realm of likelihood) that I have chosen to answer.

          If you don’t want to, you don’t have to. That’s also the nature of the internet.

  1. Brett Middleton

    I think you’re underestimating the ability of the government to create and support black markets through regulation and taxation. After all, who would have thought a few decades ago that a product that has always been legal and readily available — tobacco — would now have a burgeoning black market in several states? I’m sure retailers in those states would LOVE to reduce prices to compete. Good luck with that.

    1. SHG Post author

      That’s true. Taxation “for the greater good” has wreaked havoc with the retail cigarette market, creating a black market.

  2. Brett Middleton

    Just had another horrid thought. The buyers are patronizing the legal shops to get the receipt that will make their black market buys safer. When black markets are created by rationing, you soon find entrepreneurs springing up to deal in counterfeit and stolen ration coupons. How long before we start seeing counterfeit and stolen receipts? Are the cartels too stupid to figure out this dodge and take advantage of the additional profit opportunity?

    1. Bill

      That sure sounds like a lot of work. It didnt’ happen with alcohol or cigarettes to any meaningful extent. I have a feelings the cops aren’t really going to be all that enthused about busting people for pot without a coupon – surely some people will have bought it legally but lack the right papers – unless they can make money off such busts, I’m think the cops /prosecutors will find better things to do.

    2. Some guy in Colorado

      I could be wrong, but my understanding is that the Colorado law doesn’t actually require you to prove you bought your marijuana legally. For that matter, I don’t know that you’re actually required to buy it legally. It’s simply not illegal to possess marijuana (under a certain amount). I’ve bought it legally from recreational dispensaries in Denver a couple times and didn’t receive receipts.

      Sure, there’s a potential for a black market. Even aside from cartels. In Colorado Springs, for instance, recreational sale has not been allowed. People with licenses for medical may purchase, then turn around and sell to their friends who didn’t shell out the hundred bucks for the mmj license, but my understanding is that the risk is entirely on the seller.

  3. Patrick Maupin

    Assuming this is going on, to the extent that legalization creates greater demand, the illegal vendors might sell higher volumes than before, even if at higher prices.

    The talisman of the magical receipt seems most appealing to those formerly too scared to purchase.

  4. John Neff

    The cartels still have an illegal market to those under the legal age to purchase. I have no idea if that market is large enough to keep them from moving to states with no competition.

  5. Bill

    Maybe it’s the caliber of potheads I knew, but going through all this hassle seems like a lot of work for your a pot aficionado. Did one or two people do it? Probably, but this sounds way more like Urban Legend material than anything serious – or even remotely problematic.

  6. John Barleycorn

    Who would of guessed, that one day in America, you could openly smoke a joint in the courthouse parking lot before being sentenced for tax fraud.

  7. Pingback: On unintended consequences and the odd relationship between a traumatic pneumothorax and making marijuana legal « Hercules and the umpire.

  8. AlphaCentauri

    No one checks your receipt for a pack of cigarettes. It’s not worth anyone’s time.

    If you’re trucking in hundreds of cartons of cigarettes to sell at the local flea market every weekend, you can expect your legal competitors to call law enforcement.

    There’s no reason that pot sales won’t be governed by the same economic factors — once people get over the idea that it makes sense to burden society by spending billions of dollars incarcerating people for the crime of making themselves a burden on society by being too intoxicated to hold employment or care for their children.

    1. bill

      @AlphaCentauri – The whole ‘Too intoxicated’ portion jumps to conclusion that isn’t necessarily the case. Many work their butts off all day, put in a 10 hour day for instance, come home and smoke before bed or smoke on the weekends. If Drug use was such a clear performance killer, you wouldn’t really need random drug testing (other than for pre-emptive purposes). Many can and do use pot, booze and harder drugs without impediment at work or making themselves burdens. There are quiet a few professions that you can perform quite well high off your butt with several different substances although alcohol would almost always hinder things quickly. You can get through Harvard and Yale ‘too intoxicated’ and still become president, I believe Georgetown too for that matter. There’s plenty of other schools, those are just 3 I know of that I have evidence for.

      1. AlphaCentauri

        @bill — no argument. But why did we ever enact drug laws in the first place? If everyone using intoxicating substances were holding a job, supporting his kids, not showing up in the ER uninsured with fecal bacteria growing on his heart valves, not pawning his mother’s television, and not picking up HIV in a crack house and bringing it home to his significant other, it would never have occurred to anyone to outlaw drug use or drunkeness. It’s the addicts who are hitting bottom and impacting everyone else around them that make citizens start to resent the people profiting off other people’s addictions. But incarcerating them doesn’t address that issue in any useful way.

        1. bill

          @Alpha:

          This is where the argument gets interesting b/c there are many reasons prohibition started for any one substance and you typically hear each side say their pet reason is the cause. Why though? In part b/c of very good reasons, clear harm being done and a desire to help. In some, disgust at the addicts and what they’ve become and fear that it could happen to people like ”me’. Sensationalism, ignorance or my favorite, stories about Drug Pushers (Yah, the Tooth Fairy for Stoners and Junkies). Throw in nannyish, religious fervor and a general tendency for many to get really mad when anyone anywhere is having fun. Throw in a touch of racism and I think you’ll have a mix comprehensive enough to be indistinguishable from the real thing ;-)

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