This article is a part two. Look here for last week’s!
Welcome back to more marijuana market talk. Last week, I covered how the buildup of stock and reduction of state taxes have helped lower the price of legal weed from a $30-per-gram high, to the more moderate $11.50 per gram. This week I’ll explain other reasons for this drop, and what would make it drop further. Oh how our lives will change.
Not just anyone can sell weed legally. You need a permit, and these are doled out in a most restrictive and regulated fashion. Washington’s Liquor Control Board took control of sales, renaming itself the Liquor and Cannabis Board, and is currently not accepting applications for retail licenses. In total, only 334 retail licenses will be issued. Currently, only 173 open retailers have received licenses, with many more pending review. They’re clearly taking their time. There’s a reason too: not only the number but the rough location for allocating licenses has been predetermined, using a formula that keeps the number of retailers proportionate to each county’s most populous cities. The State says this is to keep the total amount of production in line with in-state demand.
If they’ve deduced 334 retailers to be the magic number, then that means demand is currently way above supply. Licensing in general limits the number of suppliers, limited suppliers cries out monopolistic competition, and the smidge of price-setting that goes along with it, meaning artificially inflated prices. I’m also assuming many consumers don’t have spatial accessibility – they live far enough away that the opportunity cost of the price plus travel expenses places it above their willingness to pay. Normal market forces would have businesses crop up anywhere with enough demand, but this strict licensing is an insurmountable barrier to legal entrance. We can expect to see prices drop some as we near 334 retailers, but it’s unlikely to be by much as that’s a relatively insignificant number covering geographically huge Washington.
Clearly, the recreational marijuana industry is heavily regulated. The consequent higher prices drive some people to look for substitutes to satisfy themselves. If no near-substitutes exist, people would be more willing to put up with higher prices (aka inelastic demand), because there’s no switch worth the savings. Unfortunately for legal retailers, a near-perfect substitute is out there: medical marijuana! Sure it has less pizzazz than its recreational relative, but until quite recently was barely regulated and cost a lot less. It was, apparently, quite easy to get a medical marijuana prescription, making it not too-risky an endeavor, and thus its lower cost was well worth it for numerous individuals. There were also roughly 1,100 stores state-wide, meaning easier access. However, Washington State signed a law into effect that really regulates and taxes medical marijuana, thus upping its costs, and overall reducing the benefit of picking medical marijuana over its recreational cousin. And as we all know, raising the price of a substitute good shifts demand out for the market good, reducing its price. My best guess (I don’t feel like performing an econometric analysis) is the price of recreational marijuana has gone down some as a result of this junkie switchover.
Another hurdle for this (PUN ALERT) budding industry is the federal government’s simple shoulder shrug. They’ll nonchalantly let business happen, and take that corporate income tax, but they won’t go out of their way to, say, allow credit agencies conduct business with them. This means all transactions are on a cash basis, from producer to processor to retailer. Imagine the added inefficiencies there. Furthermore, getting loans is almost impossible, and there’s ever the possibility that the fed waltzes in and removes all of a business’ assets. Low probability but high consequence outcomes are always feared for, and drive up operational costs. For the foreseeable future, this will remain a cost imbedded in the sales price, keeping it higher than a perfectly competitive market would have it.
And there you have it. My five arguments for why marijuana prices are high, why they’ve fallen, and where they’re falling to. Undoubtedly an oversimplification of the real situation, but these points hold true in terms of their impact and direction they have/will send recreational marijuana prices. The more you know.