Washington Has Been Much More Successful Than California in Displacing the Black Market for Pot

November 14, 2022   |   Tags: , , ,
Survey data indicate that Washington has been much more successful than California in shifting cannabis consumers from illegal dealers to licensed retailers.

A new report indicates that Washington, which legalized recreational marijuana in 2012, has been much more successful at displacing the black market than California, where voters approved legalization in 2016. In a 2021 survey by the International Cannabis Policy Study (ICPS), 77 percent of Washington cannabis consumers reported buying "any type of marijuana" from a "store, co-operative, or dispensary" in the previous year, while 17 percent said they had obtained pot from a "dealer."

The share of Washington consumers who report buying marijuana from a "store, co-operative, or dispensary" is higher than the average for states that have legalized recreational use, which was 57 percent in 2021, according to a nationwide ICPS survey. Washington's Liquor and Cannabis Board (LCB) paid for the ICPS report on cannabis consumption in that state, and the ICPS has not published California-specific survey data. But calculations based on estimated total consumption and legal sales suggest that the black market accounts for somewhere between two-thirds and three-quarters of marijuana purchased in California.

California's striking failure to shift consumers from illegal to legal dealers is largely due to a combination of high taxes, onerous regulations, and local retailing bans. While Washington has a relatively high retail marijuana tax (37 percent, plus standard sales taxes), in other respects the state has made it easier for licensed suppliers to compete with illegal sources.

A 2022 study from Reason Foundation (which publishes Reason) notes that local restrictions in California have created "massive cannabis deserts" where "consumers have no access to a legal retailer within a reasonable distance of their home." Washington has more than three times as many legal dispensaries per capita as California.

In their book Can Legal Weed Win?, economists Robin Goldstein and Daniel Sumner of the University of California, Davis, report that prices for "low-end" marijuana in Washington are among the cheapest in the country. "Low-end retail prices in California are more than double the low-end prices in Washington State," they note. Goldstein and Sumner describe Washington as a state with "relatively light regulations," adding that there is "no clear reason that costs would be lower in Washington State unless the differences were based on regulations." After all, "cost of production for other crops where markets are integrated—such as wine grapes, apples, and blueberries—are all similar between states."

Data from the ICPS survey of cannabis consumers indicate that legal marijuana in Washington is generally cheaper than illegal marijuana. In 2019, the average price of dried flower purchased from legal retailers was $6.06 per gram, compared to $7.01 for pot purchased from unlicensed dealers. According to the survey data, the gap has grown since then: In 2021, the average legal price was $6.51 per gram, compared to an average illegal price of $13.58, up sharply from $8.04 in 2020.

Those prices are based on purchases of various quantities, and the per-gram price is lower for larger amounts. At Uncle Ike's in Seattle, for instance, you can buy seven grams (about a quarter of an ounce) of Rozay Cake flower for $40.50, which comes out to $5.79 per gram, including tax. Overall, the ICPS reports, marijuana is cheaper in states that have legalized recreational use, and prices in Washington are lower than the average for those states.

"When Washington's first LCB-regulated retail stores opened in July 2014, the price was considerabl[y] higher than [it was in] the illicit market because legal demand exceeded legal supply," LCB Director Rick Garza says in a press release. "We knew then that if the total price dropped to below $12 per gram that the regulated retail market would be able to compete with the illicit market. As more stores opened, the price steadily fell month-over-month until it stabilized in the last five years."

Ian Eisenberg, co-owner of the Uncle Ike's chain, agrees that licensed retailers in Washington have been able to compete with illegal sources on price. Even with a hefty retail tax, he says, "our pot is arguably the best and the cheapest in the country." He thinks it is plausible that licensed retailers account for something like three-quarters of marijuana sales in Washington.

Eisenberg attributes the state's success to two main factors. Unlike in California, he notes, the medical marijuana industry in Washington was never blessed by state legislation, so it was easier for newly licensed recreational retailers to take over the market. And because Washington prohibited vertical integration, he says, there was "massive competition at the processor level to get into stores and a lot of price competition from the very early days."

Regulatory differences are not the only reason marijuana prices are lower in Washington. "Unless there is some specialized limiting resource (like fancy terroir)," Goldstein and Sumner write, "competition, economies of scale, technology, consolidation, and other efficiencies bring down the costs rapidly as markets develop—even if taxes and regulations remain costly." Since Washington legalized marijuana four years before California did, those efficiencies have had more time to kick in.

"Some costs in the legal weed market will surely fall over time as companies learn how to comply efficiently," Goldstein and Sumner say. "It is possible that legal weed production might eventually reach a scale of sophistication that allows efficiencies to overcome the taxes and regulations. Such efficiencies might allow legal weed to compete on price with unlicensed cannabis. Such convergence may be happening in Colorado and Washington, where legal flower on the low end of the price scale now sells for less than $300 per pound wholesale." But Goldstein and Sumner argue that tax and regulatory reform would hasten that process.

"We are often asked about the impact Washington's regulated marketplace has had on the illicit market," Garza says. "This study is the first one that we are aware of that shows the degree to which Washington consumers choose licensed cannabis retail stores over illegal sources. It shows that the legal market we have is working largely as it should. This is a testament to state voters who approved the initiative 10 years ago, and the fact that since [then] our political leadership including the governor and legislators, the LCB and the industry have worked to follow the will of the voters and create a safe, well-regulated system."

The post Washington Has Been Much More Successful Than California in Displacing the Black Market for Pot appeared first on Reason.com.


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