Washington state marijuana fact of the day

by on July 13, 2014 at 6:15 am in Economics, Law | Permalink

For now, prices are high: around $20 a gram, which is twice the black-market (or medical) cost. That partly reflects eye-watering excise taxes: 25% at each stage of distribution, plus normal sales taxes. But wholesale prices are high too, suggesting supply shortages are the main culprit.

There is more here, from The Economist, much of it deals with how far the United States is from having truly legalized marijuana.  [Note: an earlier version of this post mistakenly referred to Colorado.]

andrew' July 13, 2014 at 6:33 am

Where do the taxes go?

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andrew' July 13, 2014 at 7:19 am

Off topic but it just occurred to me the fda was trying to back door ban trans fat the same time it was sending my fav coffee creamer manufacturer warning letters not to make healthier claims for its trans fat free creamer.

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Jan July 13, 2014 at 11:03 am

The concern is that companies would push products with much higher total saturated fats (but no trans fats) than products with lower saturated fats (and a little bit of trans fats), and that consumers would interpret those foods to be much better for them. It’s not really in conflict with an attempt to limit trans fats generally, which are the most dangerous.

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andrew' July 13, 2014 at 12:18 pm

Wrong. The exact opposite in fact. But I have heard your opinion.

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Jan July 13, 2014 at 1:12 pm

I’m just saying I think that was their reasoning. Is there any info showing this is incorrect?

andrew' July 13, 2014 at 1:58 pm

I was going to say your best argument is that they have no reasoning at all because they are a bureaucracy.

Jan July 13, 2014 at 2:22 pm

Actually, some organizations submitted consumer survey data to FDA on the problem I mentioned above. They refer to it in the Federal Register notice.

Was there any data backing up your theory that isn’t an issue?

andrew' July 14, 2014 at 5:39 am

I don’t really even understand your point.

My point is obvious.

Jan July 14, 2014 at 5:44 am

You don’t understand the point that companies could use “the no trans fat is healthier” claim to push stuff that is actually more unhealthy, and that consumers (at least the ones from this survey) would act on those claims to buy things that are more unhealthy?

anon July 13, 2014 at 6:59 am

Whoa!

So the state of Colorado might be creating a black market for marijuana!?!?!

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Ty Davidson July 13, 2014 at 7:12 am

…. you read the article wrong. Those aren’t Colorado prices, those are Washington state prices.

From the article:

“Washington also has a medical-pot business, but it is an unregulated mess. I-502, the voter initiative that legalised marijuana in 2012, charged the state’s Liquor Control Board (LCB) with building a recreational industry from scratch.” … “Officially, the LCB hopes that within a year I-502 shops will capture 25% of the market. Others think that is optimistic. For now, prices are high: around $20 a gram, which is twice the black-market (or medical) cost. That partly reflects eye-watering excise taxes: 25% at each stage of distribution, plus normal sales taxes. But wholesale prices are high too, suggesting supply shortages are the main culprit.”

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dearieme July 13, 2014 at 9:22 am

Well, Washington, Colarado, what the hell, they’re both thousands of miles from the East coast.

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dwb July 13, 2014 at 8:49 am

I disagree that supply is the issue, or at least the *whole* issue. I think that legal pot should *always* be prices above illegal pot.

In pot, we have a lemons problem: black market dealers not only don’t label their pot, but some will lace it with opium to get you hooked on other stuff. It might not even end up being pot. Illegal pot comes with a high degree of risk. {an analogue in the heroin market is that a lot of dealers recently have been cutting it with fentanyl, which while being much more powerful, has also caused a surge in OD deaths}.

For the same reason that used cars with vs without a warranty will trade at difference prices, legal and illegal pot will trade at difference prices. There is value in ensuring that your pot is free from risk (whether its legal risk, or health risk).

This translates to wholesale prices as well: retailers will prefer to buy from wholesalers which have the lowest risk. Prices for legal pot (guaranteed product) ought to be higher in the legal wholesale market.

This by the way has two interesting implications: growers that can give a guarantee will prefer to sell into the legal market, and sales taxes may merely capture the risk premium (legal vs illegal price) with no effect on demand. In fact, one can construct examples where the legal price is *higher* than the illegal one yet demand is also higher, because (shadow cost of risk)+illegal price> legal price. In other words, the true cost of illegal pot (including legal + health risk) is actually higher than the legal market price.

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Marie July 13, 2014 at 10:22 am

This makes sense as far as it goes, but I don’t think it goes quite far enough.

I think it will be easy for folks to find someone to sell them pot off market who will not be lacing it or substituting it. You’ll have tiers in the black market, sure you can go the full drug dealer route and get it cheaper and adulterated (for some, that will be a feature not a bug, for others they just won’t have the brains or money to avoid it). But you can also go to the guy that will give his personal guarantee about the product, and his reputation or even being able to walk around his place will be what assures you that he’s up and up — not FDA, USDA or state inspections. He charges a little more but not as much as you’d pay in the stores. Just like food products. People buy black market milk or beef or vegetables, they don’t have a government stamp saying the food is safe, so they have to use other means (e.g. looking around the place of manufacture itself, talking to other consumers, inspecting the product). Sometimes someone gets sick that way, but just because of the proportions using each system it happens far less frequently than folks getting sick from e.coli outbreaks in store spinach, etc.

But then within ten years, probably five, none of that will matter because R. J. Monsanto will develop a product line that they will negotiate onto the shelves at a major retailer and get the government to put in tons of regulations that push all the little producers out. The folks selling off market now should shoot for being the only alternative standing when that happens.

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dwb July 13, 2014 at 11:37 am

The “personal guarantee” of a criminal drug dealer… is that worth more or less than the personal guarantee of a used car salesman? And the remedy if it turns out the dealer lied? Most dealers are just middle men and don’t really know what the cartel sold them in the first place.

See you are missing the fundamental issue of the lemons problem: If the “personal guarantee” was really true and they could back it up they would sell it for higher prices into the legal market. In the lemons problem, the price itself is the information signal.

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Marie July 13, 2014 at 11:58 am

Well, you can tell me where my thinking is wrong.

If a guy can sell a product for $20 on the legal market, but $5 goes to the government, he makes $15.

Some guys (particularly a subset of the ones already selling product from Mexico, etc.) will sell it illegally for $15, and make $15, and they will sell to the more desperate or foolish and they may adulterate and since they are probably selling other illegal drugs, they may even sell for $10 in order to funnel their customers into more lucrative drugs.

But you’re bound to have a third supplier emerge, small, probably a side job, and he will rely upon word of mouth and reputation and his customer base will want safe product — shoot, they’ll probably want organic. Their buyers will be able to come take a look at how they grow, and if one buyer gets a bad batch most of the others will hear about it. He can sell for $17, still make $2 more than if he tried to sell legally (which is a hassle as well as a cost), but undercut the legal market.

It’s not like a car dealer. You don’t form a relationship with a used car dealer, it’s a one time transaction. Also, used cars are a regulated industry, so when someone sells a bad car to you the next step is to go to law enforcement and regulatory agencies. If someone sells you bad pot, you go punch him in the face.

Don’t get my wrong, I’m not promoting this way of thinking, just describing it! Am I off base?

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dwb July 13, 2014 at 12:31 pm

Yes, you are off… even cigs on the black market don’t trade for the “full price” (retail – less taxes, $15 in your example) because there is a significant amount of legal risk (both you, and the dealer, have the risk of prosecution). Further, the incidence of the tax does not 100% fall on the consumer. This depends on demand/supply elasticity. This means that the retailer who values the warranty on the legal pot might pay more than the illegal dealer could otherwise get (i.e. the retailer might pay $16 and absorb the $1). A farmer will prefer to reap the higher prices in the risk-free market.

The price differential between illegal and legal pot will reflect (in part) the stringency of enforcement, along with the credibility of the dealer’s “word”. Of course, your “relationship” with your dealer could be short lived.

You should not think of legal and illegal pot as the same. You should think of one as a low quality inferior (risky) substitute. An insurance policy is a product people pay money for. Legal pot is really two products: pot, plus an insurance policy.

What will happen is market differentiation among the risk averse. A tourist/executive who cannot risk prosecution or who does not have a “relationship” will buy legal pot and pay more.

Marie July 13, 2014 at 6:26 pm

@dwb,
interesting, I’ll have to absorb it. Seems to me that the fact that this is a very easy product to produce in small quantities is an important aspect of this.

You do make me think in a couple other directions, though. I had not considered how much of this might be young professional or middle class workers who smoked in college and want to smoke now, but they don’t want to take risks (both the risk of an unhealthy product and the risk of looking bad in their circles if they use a drug dealer). I tend to think of the decriminalization movement as being about freedom of choice, but it may just be another American move to get our stuff and get it without risk. That’s interesting to me.

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msgkings July 14, 2014 at 12:04 pm

Isn’t ‘freedom of choice’ applicable to ‘get[ting] our stuff…without risk’? Right now if you choose to smoke weed, you are breaking laws (even in CO and WA, you are a Federal lawbreaker). Decriminalization increases freedom of choice pretty unequivocally.

Marie July 15, 2014 at 12:07 am

I do think there’s a difference between the government not getting in the way of a right and the government actively making sure you can practice a right without the normal risks that would go with the activity.

At the same time, the state does de facto make it safer for me to practice free speech not just by not stopping me itself, but also by enforcing laws against assault which means other people can’t punch me to shut me up, so I guess you’re right that I’m making a distinction where there probably real world isn’t one.

I guess I’m just new to the idea that some folks wanted pot legalized so it could be FDA / USDA inspected, and so they could talk about it with their friends without looking creepy. I guess I’m weird that I find that less than admirable, somehow it seems like if you want to get high so badly you should take the hit (so to speak) if someone winds up selling you oregano. But I’m a romantic.

Nate July 13, 2014 at 12:12 pm

” black market dealers not only don’t label their pot, but some will lace it with opium to get you hooked on other stuff. It might not even end up being pot”

Is this trolling? Do you actually believe this?

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dwb July 13, 2014 at 12:32 pm

clearly you have never been to college and got bad stuff.

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Nate July 13, 2014 at 12:39 pm

lololololol

Didn’t know Maureen Dowd commented on MR.

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fallibilist July 13, 2014 at 4:46 pm

I’m with Nate. It sounds like you were pretending to knowledge which you have not acquired.

Adulterated pot? Sure. “Laced with opium“? It is to laugh.

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mofo. July 14, 2014 at 10:49 am

I was going to say all of this, the OP is obviously clueless as to how the pot black market works.

Nathan W July 13, 2014 at 12:55 pm

Unless you’re talking about medical use.

Then it should cost less than black market.

Vulnerable populations who need access to valuable medicines are getting raped or directed towards unnecessarily powerful drugs which are more addictive, more damaging to the body, and which carry more extreme side effects (e.g., get more stoned, but that’s not what you call it when it’s therapeutic use.).

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Mike July 13, 2014 at 9:11 am

Supply is currently very low. There are a limited number of legal growers and they have not had much time to get the product produced. We will have a much clearer picture in another six months or so.

The contrast between the Colorado and Washington markets will present a fine natural experiment for somebody.

I’ll make three predictions, each based on the social benefits of substituting marijuana for alcohol as a recreational drug:

1) Injuries from car accidents will decline.
2) Violence will decline.
3) Bars are going to start accommodating pot smokers.

And I’ll make two more, based on the persistence of old and discredited beliefs:

1) Newspaper headlines talking about how car accidents seem more likely to involve stoned drivers – with no commentary on the decline in accidents overall.
2) Anxious stories about young pot smokers, the decline of the work ethic, and increase in risky sex, and every other stereotypical blue-nose fear, sourced with only vague data and anecdotes.

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Marie July 13, 2014 at 10:57 am

Pit bulls are afraid of pot?

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Marie July 13, 2014 at 11:04 am

Anecdotes are often used by people who have to actually live in the neighborhoods you are talking about.

As someone whose state and area are seeing pot tourists who has friends who live in neighborhoods with lots of pot stores and knows someone who was in the pot industry, I find your speculation pretty hard to read with a straight face. If you argue on the rights of the thing, I can’t go far against you. But pretending this is going to be good for any of the communities this is in, that’s just out of touch.

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Mike July 13, 2014 at 2:54 pm

We have the happy opportunity to see how it will actually turn out.

I would not claim that no harm would come of it – my claim is that we’ll see a net benefit, that whatever additional harm is causes will be offset by other gains. This benefit might not be evenly shared – some neighborhoods may well decline – but overall, I’ll bet it will be a net win for the state as a whole.

I can even suggest a way to measure it – keep an eye on how much political opposition arises. I’m guessing it won’t come even close to generating enough support to seriously challenge the law.

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Marie July 13, 2014 at 5:40 pm

Your benefits seem anti-rational to me. They seem to largely rely on the idea that folks with swap alcohol for pot. I don’t know why anyone would do that when they can just use both. Or some populations will continue to drink alcohol while others now add pot. Why would there be fewer drunk drivers? Will those formerly inclined to drink and drive now universally stay home and smoke? Won’t they smoke and drive, or continue to drink and drive while their neighbor now smokes and drives, or smoke and drink and drive?

There will be no political opposition to this, as was predicted by the previous political opposition. You can’t wind this one back, and everyone knows it. In addition, as much as I don’t like the results of this, even I would hesitate to recriminalize. Coloradans don’t like telling other people what to do. Many feel that folks should have the legal right to use pot without having any illusions that the legal use of pot will be a net practical good. I personally think everyone should have the absolute right to drive down the highway without a seatbelt on, but I don’t argue for that based on the net practical good being greater that way. Also, people want their stuff. So once enough people have become enough used to being able to get pot, they’ll be outraged at the idea that anyone would want to take their toy away.

No, I don’t think that’s a good measure.

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Jan July 13, 2014 at 11:30 am

Mark Kleiman is one of the smartest people talking about the potential risks/benefits of marijuana legalization. From what I’ve read and heard from him, he acknowledges that there will be a tail end of the curve who really are harmed by this, but asserts there are probably a lot of overblown fears and admits there are many things we just won’t know for a while.

http://luskin.ucla.edu/mark-ar-kleiman

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Marie July 13, 2014 at 12:00 pm

Thanks for the info, but I’m pretty sure Professor Kleiman doesn’t live in a neighborhood with seven pot dispensaries in a five block radius. Other peoples’ fears for themselves always look overblown.

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Jan July 13, 2014 at 1:19 pm

Heh, he is a professor at UCLA. You think he might live near some dispensaries? Let me introduce you to the weed map. ;-)

https://weedmaps.com/dispensaries/in/california/los-angeles

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Marie July 13, 2014 at 5:56 pm

I guess I read it with a biased eye, because LA is a big place, and from what I saw skimming around there are plenty of fancy places where there are no storefronts (you can certainly get it discreetly delivered there). I doubt the professor lives three blocks from his dry cleaner, much less his pot dispenser.

Marie July 13, 2014 at 6:20 pm

For the record, I am not disputing his right to have an opinion, even if he lives in the Ritz.

My knee jerk is to the “tail end of the curve” and “overblown fears” parts. It’s easy to dismiss the fears of those in some tail end you’ll never be in as overblown, if you see my point.

Jan July 13, 2014 at 7:49 pm

Anyway, I may not have fully characterized his views very well–he does seem fairly cautious about legalization.

Here is one interview with him: http://www.vox.com/2014/4/16/5620322/how-legalized-pot-would-change-america

Jan July 13, 2014 at 1:25 pm

But seriously, I would be interested in hearing some of the bad experiences you and your friends who live by the pot stores have had. If it’s more to do with simple increased traffic and “sketchy looking” people, I don’t have much sympathy. If real incidents are happening that is a shame, but how does it compare to new bars opening up down the road?

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Marie July 13, 2014 at 6:12 pm

Why wouldn’t you have much sympathy? Because you like increased traffic and sketchy looks? You think if I bought a house on a quiet cul-de-sac so my kids could ride their bikes up and down the sidewalk like I did as a kid it would be great to see me taken down a peg or two?

But, no, that’s not the deal. I’m low income, remember? So, no fancy suburban soccer mom griping about property values. And I look pretty sketchy myself most days.

No, there’s nothing horrific. Mostly, it’s just my kids seeing some pretty pathetic behavior — young moms who can’t communicate, women begging from us, men scorning regular jobs in favor of higher paying pot industry jobs. I do worry about the roads a lot, we drive around tons and adding a segment of stoned to dumb to stupid teenager to drunk to tired just ups the ante.

What I’m saying, though, is that my friends who are now in walking distance of half a dozen storefronts aren’t using them. It’s folks driving in and driving out. It’s the same old story, the overall “benefit” of legalizing pot is that the spoiled young get to buy it because — well, because they want it. And the overall down side of legalizing pot is the degradation of individuals and neighborhoods.

So, tell me people have the right to be asses. They do. I agree. I guess it gets to stay legal.

But don’t tell me that outside of this pure rights argument there is an overall benefit to legalization. Because when the rich guys gain by 100 and the poor guys lose by 1000, the rich guys are always the ones writing the papers that say that’s a net gain.

Marie July 13, 2014 at 6:30 pm

Oh, and I am seeing a lot more crime and road accidents, but I have no way of knowing if that’s related to the pot, so it can’t go to my argument at all, except for that my friend who is already living in a neighborhood where people are robbing each other maybe should catch a break on having sketchy traffic added to that.

Jan July 13, 2014 at 7:46 pm

No sympathy simply because increased traffic can come from literally any kind of business opening in your neighborhood–it is not a marijuana dispensary-specific issue. If you’re opposed to more traffic, fight fast food establishments and new gas stations as fiercely as you do pot-related businesses. And sketchy looking people are not a problem in and of themselves. To many, black people are sketchy looking and make them uncomfortable. You see what I’m getting at?

I empathize with you being hassled by more beggars and potential increases in drugged driving and accidents. (These beggars are omen only? An this is directly related to the pot being sold nearby, like the bum in front of the liquor store panhandling to buy a drink?). I don’t quite know what you mean by young moms who can’t communicate. As for men scorning regular jobs, look at this in the context of the economy. There are a lot of people who can’t get any job. Are you going to begrudge these guys a job providing a product to willing customers for a legal product? Many of them are now making more money to provide for their families. Do you also have a problem with guys getting jobs driving beer delivery trucks or working as bartenders? It seems like kind of a double standard.

I don’t understand what exactly you are saying about this disproportionately benefitting the rich. The research is biased because the researchers are somehow getting rich off this? If not that, what is their motivation for saying it is a net benefit?

If we can get some data to shake out demonstrating that proximity to a dispensary is problematic for XX reasons, then there isn’t any reason that cities and states shouldn’t regulate the number and concentration of dispensaries, just like they do for bars and liquor stores. That seems to be a reasonable approach.

Rahul July 13, 2014 at 1:56 pm

Must a good onco-surgeon have had suffered from cancer himself?

Having suffered an affliction is neither a necessary nor sufficient condition for being good at understanding nor treating it. I take no sides in this particular fight but dislike the form of argument you are making here.

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Marie July 13, 2014 at 5:33 pm

Rahul,
You mistake my argument.
Let me use cancer — reading “Henrietta Lacks” right now and there’s the great story of Dr. Southam. He injected subjects with cancer cells, his research showed that when he did this with patients who already had some form of cancer the resulting tumors would persist. When he did this with prisoner volunteers, they developed tumors but the tumors then disappeared.

He later injected ob/gyn patients with cancer cells to continue his research. He didn’t inform them that this is what he was doing, he told them he was testing them for cancer, and justified that because he believed those with hidden cancer would make and keep tumors. He saw no reason to give them full details on what the injection contained, because in their ignorance they’d just balk.

They asked him if he had injected the cells himself. He said, “Let’s face it, there are relatively few skilled cancer researchers, and it seemed stupid to take even the little risk.”

It’s not about someone not being able to access risk well if he hasn’t personal experience with something. It’s about risks looking a lot bigger when you are taking them yourself and a lot smaller when someone else is taking them.

Marie July 13, 2014 at 6:39 pm

Assess, not access. See, I don’t need pot.

fallibilist July 13, 2014 at 5:20 pm

Both the Colorado and Washington law have been written/interpreted to forbid bars from accommodating pot smokers.*

*(This may become moot due to e-cigs and edibles.)

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sam July 13, 2014 at 10:18 am

What are the NA trade implications? Canada is setting up an industrial cannabis farming system with a “free market” price. Last I read it’s expected to settle around $8 a gram retail but no one really knows. Will states be allowed to buy Canadian pot? Will it work like it does for other prescription drugs the US buys from Canada? If Canada legalizes (which is on the platform of the Liberal party), how will Washington stop cross border arbitrage?

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Danb July 13, 2014 at 10:56 am

Just a heads ups, $20 per gram is the black market price for marijuana of the quality being sold in Colorado. It’s certainly not double. Anyone paying $10 per gram is getting some very low end product or has a very nice friend.

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fallibilist July 13, 2014 at 5:22 pm

$70 for an eighth?

You couldn’t pawn that off on the East Coast.

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mofo. July 14, 2014 at 11:01 am

$10 a gram last i checked, and thats for high-quality stuff. And im in a state without legalization.

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Jameson Burt July 13, 2014 at 12:21 pm

INEXPLICABLE HIGH PRICE, $20 per gram.
The hemp plant is truly a weed, hard to get rid of, that had dominated the U.S. land. Its price seems like the Holland tulips, a bubble that collapsed quickly. Anybody can plant its seeds to get plants themselves. At $20 per gram, I’d think most users would plant it themselves and smoke it unrefined. I suspect it’s easier to grow than most crops, which sell for $3 per pound. I’m missing something on the economics of agriculture.

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mofo. July 14, 2014 at 11:03 am

Yea, the part you are missing is that its actually not that easy to grow, at least with any real success.

Heres an analogy to help you understand, its easy to distill some kind of alcohol, its difficult to distill alcohol that you would actually want to drink.

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Nathan W July 13, 2014 at 12:59 pm

The logic seems pretty clear to me in the article.

Many people would prefer to go legit if they can. If it’s a novelty item for occasional weekends, $20 isn’t a big deal. So there will be that
market.

But there aren’t enough permits for legal supply.

So the market serves the clients willing to pay most.

Who probably are casual light users, since the total price of higher volume costs are low. Given that the state already has a fairly accessible medical program, I doubt the people who rely on it most are having to pay $20 a gram.

Once more applications have worked their way through the red tape, there will be more supply and prices will come down, to some “market price” reflecting taxes, cost of doing business, etc.

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Silas Barta July 14, 2014 at 6:17 pm

In other news, liberals finally discover the Laffer Curve!

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Andy July 15, 2014 at 9:33 pm

On the black market for pot, the real risk is not in getting laced pot. Laced pot does not exists out then if you want laced pot. Drug dealers are cost minimizers, and would not increase variable costs to put opium in you weed.

The real risk with pot is that you pay $20 for a gram, which is not a crazy price for good quality weed (maybe a little lower in most places), but the risk is you get bad weed that looks and smells good. That is the market for lemons. If you get rid of the lemons in the weed market then yes, prices should go up, correct?

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andrew' July 13, 2014 at 7:55 am

See my comment above. You sticklers are measuring with an RCH and cutting with a ditch witch.

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andrew' July 13, 2014 at 7:56 am

Good. Except that I do a good job.

Anyway, all that matters is that there are no real problems to talk about.

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