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Introduction

The campaign to legalize cannabis in various U.S. states was driven promises of an end to the “War on Marijuana”. An opportunity to redirect taxpayer dollars toward community healing, and undermine the illegal cannabis market. However, reality does not always align with the vision. While legalizing cannabis usurping the illegal market made sense on paper, the black market for cannabis is far from disappearing. Unfortunately, there are many reasons why the illegal cannabis market continues to thrive, even in states where it has been legalized.

The Broken Promise of Ending the War on Marijuana

The “War on Marijuana” was one of the central arguments in favor of cannabis legalization. The idea was to shift law enforcement’s focus from cannabis-related arrests to more pressing community issues. Yet, in states where cannabis is now legal, the black market persists, and it’s often more active than ever.

Arrests on the Rise After Legalization

Contrary to expectations, arrests related to cannabis have increased following legalization in some areas. Per Rutgers Center of Alcohol and Substance abuse, California’s reports for example suggest a staggering 166% increase in arrests compared to 1996. This raises questions about the effectiveness of legalization in lightening the law enforcement burden.

One significant factor contributing to the persistence of the black market sales and arrest is the surplus of cannabis in legal states. California, for instance, produces nearly five times the amount of cannabis that is consumed legally in state. This out of balance supply and demand economics leads to out-of-state smuggling, despite restrictions to inter-state commerce on cannabis. Some product goes to non-legalized states, but some goes to legal markets with companies who cannot compete on price legally.

Individuals unloading boxes from a truck during a move
Transportation workers can be seen moving parcel pieces; whether they’re legal packages or not is unknown to them.
Legalization Doesn’t Always Eradicate the Black Market

California, as a trailblazer in cannabis legalization, provides a vivid example of how legalization doesn’t necessarily eradicate the illegal market. Despite becoming the first state to legalize medical cannabis in 1996 and recreational use in 2016, California’s black market is thriving. California’s black market for cannabis thrives due to a combination of factors, including high taxes on legal cannabis, stringent regulations, oversupply, licensing complexities, challenges in law enforcement, and lower prices in the illegal market. Consumers seek convenient and affordable options, and the convenient abundance of unlicensed retailers and delivery services contributes to the problem. These challenges reflect the complexities of transitioning from an illicit market to a legal one, allowing the black market to persist despite legalization.

Advantages & Disadvantages of the Black Market

Local dealers and sellers on the black market enjoy some crucial advantages over licensed dispensaries. The most prominent advantage is price. High taxation on legal cannabis drives up its cost, making it unaffordable for many consumers. This high tax percentages, present in states like California, Colorado, Oregon, and Washington, drives consumers to the more affordable black market. The rise of illegal dispensaries, some even presenting themselves as licensed dealers, compounds the challenge of law enforcement. Investigating these illegal businesses is time-consuming, and authorities are struggling to curb the proliferation of unlicensed shops.

The disadvantages of black market cannabis sales are numerous. Firstly, they lack regulatory oversight, posing potential health risks as product quality and safety standards are not guaranteed. Things such as mold, harsh chemicals are sometimes present and not disclosed. Secondly, black market sales evade taxation, resulting in lost revenue for public services which in turn hurts locals. Thirdly, these illegal operations can contribute to criminal activity, undermining community safety and personal safety if you run one of these establishments. Lastly, the absence of consumer protection in the underground market can leave customers vulnerable to scams and unscrupulous practices.

A laboratory setting with scientists conducting tests on cannabis plants. The researchers are carefully examining the plants, taking notes, and recording data
Cannabis being placed into vial for further testing.
The Intricate Economics of Legal vs. Illegal Cannabis Markets

As the world continues to grapple with the complex interplay between legal and illegal markets, it is clear that the road to full integration will be long and challenging. However, by understanding the underlying factors and constantly adapting regulations, we can inch closer to a future where cannabis legalization fulfills its original promises.

The financial paradox that surrounds legal and illegal cannabis markets is a complex web to unravel. The promises of legalized cannabis are noble – economic growth, decreased criminal penalties, and enhanced control over the product’s safety and distribution. While these promises have, to some extent, materialized, significant challenges remain.

  1. Taxation and Affordability: The economic dynamics of legal cannabis are heavily influenced by taxation. Some states have imposed substantial taxes on the sale of cannabis, causing the price of legal marijuana to soar. These taxes include excise taxes, cultivation taxes, and sales taxes, all of which contribute to the high cost of legal cannabis. In contrast, the black market thrives on affordability. Local dealers can offer cannabis at lower prices due to lower operating costs and a lack of taxation. This significant price difference drives budget-conscious consumers to the illegal market, where they can purchase cannabis more cheaply.
  1. Oversupply and Smuggling: like mention previously, oversupply is another conundrum facing the legal cannabis market. Some states, like California, produce cannabis far in excess of what can be legally consumed. This surplus creates a tempting opportunity for off-state smuggling. Large quantities of legal cannabis are diverted to illegal markets in other states, perpetuating the black market’s strength. The challenge of oversupply can undermine the promises of legalization, as it fails to quash the illegal market. It also emphasizes the need for better market forecasting and supply chain management to ensure legal cannabis is consumed within the state where it’s produced.
The Resilience of Illegal Dispensaries

The rise of illegal dispensaries further complicates the dynamics of legal and illegal cannabis markets. These establishments often pose as licensed dealers, making it challenging for law enforcement to distinguish between legal and illegal operators.

The efforts to investigate and shut down illegal dispensaries are time-consuming, leaving room for the proliferation of unlicensed shops. Online platforms, like Weedmaps, have also faced criticism for listing illegal dispensaries, indirectly contributing to the continued growth of the black market.

Conclusion

The coexistence of legal and illegal cannabis markets underscores the complexity of transitioning a once-illicit industry into the legitimate economy.  While legalization has brought significant benefits, it has not entirely eliminated illegal cannabis operations. Factors like surplus production, heavy taxation, and the rise of illegal dispensaries will continue to contribute to the black market’s persistence until federal legalization, at which point, the entire game will be turned on its head again. Entrepreneurs should stay vigilant of the macro economic environment as we continue to navigate the intricate economics of legal and illegal cannabis markets.

 

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