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Pot Economics: What's the Future of the American Marijuana Market?

With widespread legalization more than just a pipe dream, the U.S. now grapples with an influx of a new form of 'over the table' income.
 
 
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In November 2012, voters in Colorado and Washington state made historic decisions to legalize marijuana for recreational sale and use, flying in the face of anti-pot moralists, drug warriors, and a century’s worth of prohibitionist policy. At the start of this year, these policies began to take effect, with pot shops opening for business for the first time on this side of the Atlantic.

Once thought to be a mere pipe dream, legalization now seems like an inevitability; at the time of this writing, no fewer than eleven states are considering some form of legislation to allow marijuana to be sold over the counter, and at least a dozen others are considering decriminalization or medical-marijuana measures. Tired of federal foot-dragging, states as disparate as Alaska, New Mexico, and Vermont are cautiously weighing the potential benefits of legalization, persuaded not only by abstract arguments about individual liberty but also by hopes of pumping money into their economies. Meanwhile, advocates have been quick to promote marijuana as just the medicine states need to fill their coffers, create new jobs, and cut costs by keeping nonviolent drug offenders out of jail (see original article’s sidebar, “The Drug War: Wasting Lives and Dollars”).

But what would the economic impact of widespread legalization be? There are dozens of factors to consider, particularly on the revenue side of the equation: How many people will be consuming marijuana, and how much? What states stand to benefit most from growing it? Will big business take over its production and sale, or will it remain in the hands of independent growers and dealers? And how large, in dollar terms, might this whole sector end up?

The jury is still out on what the ultimate financial impact of legalization would be, but in the past few years a growing body of research has explored the possible contours of a new marijuana economy. This, combined with some publicly available data and the wisdom of a few folks who have watched the legalization movement grow over the last 40 years, can give us a good sense of how the plant might (or might not) live up to its proponents’ expectations.

It seems like high time for a little lesson in pot economics.

Out of the Shadows

Because marijuana is currently grown, distributed, and sold almost entirely on the black market and is used largely out of the public eye, assessing the value of the national market for marijuana (including imports and non-recreational uses, such as hemp fiber) is tricky. The trade journal Medical Marijuana Business Daily currently estimates that a fully legalized cannabis market could be as large as $46 billion per year, while more conservative observers peg it at anywhere between $10 billion and $40 billion.

There are about 7.6 million frequent marijuana smokers in the United States, according to the 2012 National Survey on Drug Use and Health. Nearly 23.9 million Americans use the drug semi-regularly. Marijuana is sold widely on the black market, and is readily available on street corners, in bars and nightclubs, and in high-school hallways (as 80 percent of students reported to the National Institute on Drug Abuse in 2012). Except for the relatively small number of people who have purchased medical marijuana through licensed dispensaries, the vast majority of these users buy their weed on this black market — either directly from dealers or from friends with access to a dealer.

In a world where marijuana is legal to buy and possess, this would not likely be the case for long.

Assuming that demand for the drug remains relatively stable ( see original article’s sidebar, “The Demand Question”), a legal marketplace for marijuana will likely replicate the current distribution system for alcohol and be sold in stores with special permits. Where exactly it could be sold would largely be a matter for state and local regulators to decide, just as it currently is with alcohol; municipalities might allow lower-strength varieties to be sold in corner stores (like beer and wine are in many states) or coffee shops (à la Amsterdam), but it’s virtually certain that any store selling any quantity or type of weed would need to get a special license.