The Economics of Pot and the Nature of the “Obvious”

Yglesias highlights a new book that argues:

There’s been relatively little analysis of what a legal marijuana industry might look like. One key but little-appreciated fact is that, according to persuasive research by Jonathan Caulkins, Angela Hawken, Beau Kilmer, and Mark Kleiman in their new book Marijuana Legalization: What Everyone Needs To Know, is that legal pot would be amazingly cheap. In fact, midgrade stuff would be so cheap that it might make sense for businesses to give it away like ketchup packets or bar nuts.

America’s farmlands are some of the most productive in the world, thanks in no small part to technology and the existence of scale sufficient to leverage that technology. Even what Americans think of as a small family farm is quite large compared with an illicit marijuana operation. There are no amber waves of cannabis anywhere in the world today, but under a true legalization regime there would be. And this makes all the difference.

How cheaply could pot be grown with advanced farming techniques? One potential data point is Canada’s industrial hemp industry, where production costs are about $500 per acre. If the kind of mid-grade commercial weed that accounts for about 80 percent of the U.S. market could be grown that cheaply, it implies costs of about 20 cents per pound of smokable material: Enough pot to fill more than 800 modest-sized half-gram joints for less than a quarter!

The superficial ineffectiveness of prohibition masks a huge impact on the supply side that, for better or for worse, is what stands between America and much cheaper highs.

This is fascinating. Not the pot angle which is interesting enough, but the nature of the argument itself which is both absolutely, unambiguously, obviously true once stated, and yet something which literally had never occurred to me. Nor, indeed, is this an argument I can recall being well enunciated elsewhere.

And it isn’t like I haven’t thought about marijuana legalization before. I have. I support it. I still do. I do because in the final analysis I consider marijuana prohibition to be an arbitrary and unnecessary imposition on personal freedom. But the full economic consequences of this, particularly for marijuana pricing, never occurred to me. And yet, it is obvious, isn’t it now that you’ve heard it?

I love these sorts of arguments. Just a great reminder about how often we can miss big things that are staring us right in the face.

2 comments to The Economics of Pot and the Nature of the “Obvious”

  • phageghost

    “Why is pot against the law? It wouldn’t be because anyone can grow it, and therefore you can’t make a profit off it, would it?” – Comedian Bill Hicks

    So: no corporations or moneyed interests lobbying for legalization – there’s no potential profit there. On the other hand there are plenty of corporations and law enforcement agencies that make huge profits by keeping it illegal.

    Yeah, one doesn’t have to be a master of political economy to see why the status quo obtains.

  • phageghost

    I should also mention that the current producers are against legalization for the same reason – their profits would vanish. But of course their influence on the political process at the national level is negligible.

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