Marijuana Price Gradients: Implications for Exports and Export-Generated
Tax Revenue for California After Legalization
Jonathan P. Caulkins
Brittany M. Bond
Abstract
California nearly legalized commercial marijuana production in 2010; it and other states are expected to
entertain similar proposals in coming years. This raises the question of whether marijuana diverted from
legal production could displace current sources of marijuana in other states. Combining Kilmer et al.’s
(2010a,b) estimates of legal production cost with new estimates of the cost of smuggling within the U.S.
suggests that in most states diverted legal production would substantially undercut current prices. So if
one state legalized, such (illegal) inter-state “exports” could depress marijuana prices throughout the U.S.,
even if taxes are collected before diversion and export. We proxy smuggling costs by the current gradient
in prices observed for Mexican or commercial grade marijuana; based on seven different data sets it
appears to be roughly $325 - $475 per pound per thousand miles as one moves north from the Mexican
border.
Keywords: Drug policy, drug markets, marijuana, prices, legalization
Running Head: Marijuana price gradients and implications for legalization
1
INTRODUCTION
California entertained two serious proposals to legalize marijuana in 2010: a legislative bill (the
“Ammiano Bill”) that died before receiving a full vote and a voter proposition (“Proposition 19”) that was
narrowly defeated on November 2nd. Either could have made large-scale commercial production for
recreational use legal with respect to state and local laws, something no jurisdiction in the world has done.
Kilmer et al. (2010a, 2010b) offer a comprehensive analysis of implications for California budgets and
marijuana consumption, and effects on Mexican drug trafficking organizations’ revenues and violence.
Here we investigate an under-appreciated implication of legalization: the possibility that
marijuana diverted from legal production might be (illegally) exported to other jurisdictions. Such
exports could place downward pressure on prices elsewhere and, if the diversion occurs after taxes were
collected, potentially create export-based tax revenue for the state that legalized.
The viability of this scenario would depend on how legalization is implemented and on federal
and other states’ law enforcement responds. We defer discussion of such qualifications to the end of the
paper, but acknowledge that we are discussing only one plausible scenario.
Superficially it seems implausible that taxes might be collected on exports, given that those
exports would remain illegal. However, some growers could produce for both the legitimate market and
the inter-state black market, as happens with regulated opium production in India today (Paoli et al.,
2008). If taxes are collected from the producer, rather than at retail, then taxes might be collected before
the marijuana is diverted. Indeed, even (purely criminal) exporters might value having their purchases be
above board and, hence, taxed, if that reduces their risks when acquiring the marijuana.
This issue remains topical even though both California measures failed for three reasons. First,
the analysis sheds light on the cost of transporting illegal drugs within the U.S. Second, there will likely
be future efforts to legalize marijuana in California. Third, legalization in some but not all states or
nations in a region could happen elsewhere, and the approach might carry over, even though the
parameters here are specific to the U.S.
2
The basic exercise is to compare for each U.S. state in the lower 48 (1) the projected postlegalization price in California bumped up by the cost of smuggling marijuana illegally from California
with (2) the current price of marijuana. If the former is smaller, then it is plausible that California might
end up supplying consumers in that other state. We ignore the possibility of exports to Alaska, Hawaii,
and other countries; the estimates are conservative in that respect.
Kilmer et al. (2010a) estimated production costs after legalization and discuss potential taxes and
tax evasion.
As we explain below, smugglers might be able to acquire high-quality marijuana
(sinsemilla) in California at prices ranging from $300 per pound (low-end production cost, untaxed) to
$1350 per pound (high-end production cost, with sales and a $50 per ounce excise tax).
Although $300 - $1350 per pound is well below current sinsemilla prices, even $300 per pound is
very high compared to most conventional goods; it is roughly the same price per unit weight as silver. At
those value-to-weight ratios, conventional distribution costs (fuel, labor, etc.) become minor
considerations. Rather, it is costly to transport marijuana primarily because of the need to compensate
for various risks, particularly of enforcement (Reuter and Kleiman, 1986; Caulkins and Reuter, 2010).
Legalizing marijuana in California should not greatly affect the cost of smuggling from California
to other states because most of the smuggling risk comes from enforcement by the federal government
and other states. Hence, we infer future smuggling costs from currently observed spatial variation in
marijuana prices. Essentially, we plot current price vs. distance from presumed source and observe the
slope. This linear model is a simplification, but it fits the data reasonably well.
Drug prices are not measured perfectly, so this approach only works if the price gradient is large
relative to the error in measurement of prices. The coefficient of variation of measured prices is roughly
the same across a range of drugs (Reuter and Caulkins, 2004), so the price gradient is easiest to measure
for a cheaper drug, namely Mexican or “commercial grade” marijuana. (Ditch weed can be cheaper still,
but it has no single source location.) So we estimate future smuggling costs with current commercial
grade marijuana data, even though post-legalization we expect essentially all domestic production to be
3
sinsemilla (Kilmer et al., 2010a). Since marijuana sentences are based on weight, not marijuana type or
potency, this may not be unreasonable.
We turn now to the data and price gradient. Section 3 estimates California market share postlegalization. Section 4 concludes.
GRADIENT IN MARIJUANA PRICES OBSERVED WITHIN THE U.S.
SOURCES OF PRICE DATA
The ideal data for examining the relationship between price and distance from source would be
official reports on current wholesale prices for Mexican marijuana in every one of the lower 48 states.
There is no ideal data set. So instead we use every available data set that is relevant. Inasmuch as the
same general pattern holds in each, we can be reasonably confident of the basic finding.
In particular, we use data from seven sources that are described briefly in the Appendix and in
more detail by Bond and Caulkins (2010): the Narcotic News website (http://www.narcoticnews.com/),
the National Drug Intelligence Center (NDIC) Drug Market Analysis reports, the Drug Enforcement
Administration’s (DEA’s) System to Retrieve Information from Drug Evidence (STRIDE) database, the
DEA’s Illegal Drug Price/Purity Reports (IDPPR), the Arrestee Drug Abuse Monitoring (ADAM)
system, High Times magazine, and a new website Price of Weed. Table 1 summarizes key attributes of
the data sets.
The sources are not entirely independent; one would presume NDIC draws on information from
DEA. However, none is simply a copy of another. For example, the Narcotic News website and NDIC
Market Analysis prices are highly correlated (correlation 0.647), but for only one state do they quote
exactly the same price (Utah, $600 - $1000 per pound).
4
Table 1: Seven Data Sets Used to Estimate the Marijuana Price Gradient Within the U.S.
Market
Source
# of
Level
Quality/Type
States
Time
Source
DEA IDPPR
Pound
Commercial Grade
16
1999-2001
Enforcement Agency
NDIC
Pound
Mexican
39
2001-2009
Enforcement Agency
STRIDE
Pound
$250 - $2000/lb.
25
2005-2009
Transaction Data
Enforcement Agency
Narcotics News
Pound
Not sinsemilla or high grade
48
2010
Voluntary Report
200-1500 grams and average
ADAM
Pound
price < $1900 per pound
27
2000-2003
User (Arrestee) Survey
High Times
Ounce
Schwag
45
1996-2005
User Voluntary Report
Price of Weed
Ounce
"Low"
47
2010
User Voluntary Report
DISTANCE DATA
Distances were proxied by distance to the nearest city in Mexico, computed using the web site
http://www.mapcrow.info/Distance_Mexico.html. Effectively this is akin to assuming that transport costs
within Mexico between production areas and border cities are small. Marijuana is also imported from
Canada (mostly sinsemilla) and Jamaica, and there is illegal domestic production. Nevertheless, Kilmer
et al. (2010b) estimate that Mexican marijuana accounts for 40 – 67% of U.S. marijuana consumption,
and so is the majority of the roughly 80% of that market which is not sinsemilla.
Proximity to Canada may affect prices, so we considered Canada as a potential source. In
particular, we computed distances to the “nearest” source, in Mexico or Canada (specifically Vancouver
or Quebec), allowing for an additional “fixed charge” representing how much harder it is to smuggle
across the US-Canadian border than across the US-Mexican border. This did not improve explanatory
power, so we report here only price vs. distance from Mexico. Likewise adding other independent
variables (e.g., population for prices quoted at the city level) did not statistically improve the fit, although
searching for better multivariate models may be an avenue for further research.
5
CORRELATIONS AND DESCRIPTIVE STATISTICS WITH STATE LEVEL PRICES
Table 2 shows that inter-state variation in price is positively correlated across all pairs of data
sets, and prices in all seven are positively correlated with distance from Mexico. Where the data were not
originally at the state level, we took a simple, unweighted average across city-specific prices. E.g., the
Narcotic News California price of $416 per pound is a simple average of the prices for San Diego ($350),
Los Angeles ($375), San Francisco ($438), and Fresno ($500).
The four data sets supplied by
enforcement agencies show the highest correlations with distance and with each other; the three data sets
based on user reports appear to include more random variation.
Table 2: Correlation in Marijuana Prices Across Data Sets and with Distance from Mexico
DEA
Distance
Distance from Mexico
IDPPR
Narcotics
NDIC
STRIDE
News
High
ADAM
Times
1.0
DEA IDPPR
0.596
1.0
NDIC
0.547
0.736
1.0
STRIDE
0.688
0.661
0.594
1.0
Narcotics News
0.674
0.663
0.647
0.567
1.0
ADAM
0.264
0.494
0.329
0.573
0.212
1.0
High Times
0.318
0.604
0.276
0.521
0.288
0.297
1.0
Price of Weed
0.285
0.364
0.286
0.493
0.400
0.629
0.423
Figure 1 plots state-level price per pound vs. distance from Mexico for STRIDE and Narcotics
News. STRIDE is the most familiar in the academic literature, and Narcotic News is the only one that
both covers all the states and is (at least purportedly) based on enforcement agency data.
6
The pattern of price increasing with distance is clear at a glance, as is the considerable dispersion
around the trend lines. The two slopes ($343 and $463 per pound per thousand miles for NN and
STRIDE, respectively) may bracket the true value, since the actual value along the Mexican border (at a
distance of 0) is about $400 per pound (Kilmer et al., 2010b), which is roughly half way between the
intercepts of these two linear relations.
Figure 1: Marijuana Price per Pound vs. Distance from Mexico in Data from STRIDE and Narcotics News
$1,600
y = 0.3428x + 561.22
R² = 0.454
$1,400
$1,200
$1,000
$800
$600
y = 0.4633x + 281.53
R² = 0.4728
$400
STRIDE
$200
Narcotics News
$0
0
500
1000
1500
2000
Distance from Mexico (Miles)
PRICE GRADIENT RESULTS FOR MEXICAN/COMMERCIAL GRADE MARIJUANA IN THE U.S.
We created similar plots for all the data series, keeping the analysis at the city level when
possible. Table 3 summarizes the results. The gradients are between $325 and $475 per pound per
thousand miles. We use that range in our analysis below, with $400 as the base case value.
7
Some data sets were explicitly about Mexican marijuana, but most were not so specific. That is
problematic because price varies by type and quality of marijuana. As noted below and in the Appendix,
we dropped observations whose prices were clearly inconsistent with other prices of Mexican marijuana.
This is necessarily a somewhat subjective process, but we verified that inclusion or exclusion does not
dramatically affect the estimated price gradients.
Table 3: Summary of Regressions of Price vs. Distance from Source
Price Gradient
Intercept,
Source
$/lb increase/ 1000
2
Constant
R
miles
Narcotic News
$482
0.518
$392
STRIDE
$237
0.427
$474
NDIC
$637
0.300
$343
$516
0.621
$437
$638
0.593
$438
$681
0.494
$439
ADAM
$545
0.113`
$351
ADAM, excluding 4 cities with avg price/lb. > $1900
$421
0.306
$322
High Times
NA
0.166
$337
Price of Weed
NA
0.081
$416
IDPPR
IDPPR All years (1986 – 2000) with 14 dummy variables
for individual years
IDPPR All years (1986 – 2000) with 4 dummy variables
for clusters of 3 yrs
IDPPR Average of 15 separate single year regressions,
1986-2000
This issue was most pronounced for ADAM and STRIDE, the two data sets which do not even
distinguish sinsemilla from commercial grade. Kilmer et al. (2010b) found that 80% of ADAM’s price
8
observations were well below those associated with sinsemilla, but four of the 40 cities stand out for
having pound level (200-1500 gram) prices that are high in absolute terms ($1950 - $2575 per pound) and
far above the regression line. Not coincidentally, all four (San Jose, Portland OR, Spokane, and Seattle),
were in or near Northern California, a region associated with extensive sinsemilla production. Table 3
shows that dropping those cities greatly improved the fit but only modestly affected the price gradient.
The only other city whose price exceeded $1205 was Detroit ($1705 per pound). We retained that data
point because it is not a gross outlier considering distance from Mexico; dropping it would further reduce
the gradient (to $276 per pound per 1000 miles) without materially improving the fit.
There is one data set that is not entirely consistent with price gradients of $325 - $475 per pound.
DEA IDPPR data are available for a range of years. Combining data across years produces gradients of
about $440 per pound per thousand miles, but in some individual years the gradient was lower or higher.
Table 3 shows results of regressions with dummy variables for each year and for three-year blocks, as
well as the average gradient when running separate regressions for each year. Figure 2 shows how the
price gradients from the single-year regressions changed over time. That variation does not appear
random; the gradient generally increased from 1986 to 1996, and fell thereafter. This suggests that the
gradient can vary over time with circumstances, and need not always be approximately $400 per pound
per thousand miles. There is a loose correlation with changes over time in marijuana enforcement
intensity, but not one clear enough to draw conclusions.
It is interesting to compare the magnitude of these gradients with rough estimates of the tangible,
monetary costs of smuggling. Suppose two people took three days to drive to California from 1,000 miles
away, purchase a wholesale quantity of marijuana, and return. The direct cost of such a trip might be
roughly $2,000 - $2,500.1 If the trip involved purchasing and re-selling only 5 pounds, those tangible
costs would explain the entire price gradient; that sets a rough floor on the minimum viable size of
domestic wholesale marijuana distributors who profit by arbitraging price variation between locations. If
the trip involved transporting 50 pounds, then these tangible costs would amount to only $40 - $50 per
pound per thousand miles. That does not contradict the observed gradient; the difference could represent
9
compensation for the risks of arrest, being robbed, and/or violent confrontation with other transaction
parties (Reuter and Kleiman, 1986).2
Figure 2: Price Gradients in IDPPR Data by Year, 1986 – 2000
(Point Estimates and 90% Confidence Intervals)
$1,000
$800
$600
$400
$200
$0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
OTHER PRICE GRADIENT RESULTS
We looked for other evidence of marijuana price gradients. We expected sinsemilla prices to
increase with distance from Northern California, but there was no such pattern in High Times data for the
U.S. as a whole. (Within California prices near Humboldt County tended to be lower, but there are
obvious omitted variables that could be driving that result.) This non-finding could be caused by
production elsewhere in the U.S and/or data limitations; a two standard deviation range around an average
sinsemilla price of $4,000 per pound is large relative to the price gradients we have estimated (Reuter and
Caulkins, 2004), yielding a poor “signal to noise” ratio for sinsemilla. Similar consideration would make
it difficult to estimate a gradient in prices of cocaine or heroin.
10
We replicated the analysis for Leggett’s (2006, p. 31) herb and resin prices for eleven European
countries as a function of distance from Gibraltar – reflecting a belief that Morocco is an important source
of cannabis in Europe. Univariate regressions of price on distance had fairly high R2 for resin and herb
(0.51 and 0.47 respectively) and even higher for the average of the two (0.62), with price gradients that
were larger but still sensible ($1621, $1198, and $1410 per pound per thousand miles, respectively).
However, distance and number of additional international boundaries crossed are very highly correlated
(correlation coefficient 0.9), and the fit is just as good if the explanatory variable is international borders
crossed, not distance. So (1) There is a systematic tendency for European cannabis prices to increase with
distance from Morocco, (2) The data are not inconsistent with what we estimated using the U.S. data, but
(3) There is no way to estimate a price gradient reliably; some or all of the relationship could be explained
by border crossing, not distance per se.
In Clements (2004) data, Australian marijuana prices are highest in North South Wales,
intermediate in Victoria and the Australian Capital Territory, and lowest everywhere else. South
Australia is sometimes thought of as Australia’s analog to California’s Emerald Triangle, and Clements’
“Head” (sinsemilla) prices do increase steadily with distance as one moves from Adelaide to Melbourne,
Canberra, and Sydney. However, that is only four data points, and the other states’ prices only fit a price
vs. distance story if they have their own local supplies, rather than importing from South Australia. An
equally plausible story is simply that Australian marijuana prices are the same everywhere, except for
being more expensive in big cities (Sydney and Melbourne) and in the Australian Capital Territory, which
is an idiosyncratic place in many respects.
IMPLICATIONS FOR CALIFORNIA’S POTENTIAL SHARE OF THE MARKET
This section (1) describes plausible prices for diverted sinsemilla in California post-legalization,
(2) estimates how much of the sinsemilla market in the lower 48 states outside of California might be
supplied by marijuana diverted from legal production in California, and (3) does the same for commercial
grade marijuana.
11
PRICES IN CALIFORNIA
Kilmer et al. (2010a) estimated production costs in grow houses after legalization to be $200 $400 per pound of unbranded sinsemilla, with additional processing costs of $20 - $35 per pound.
Allowing a 25% supplier markup, this suggests wholesale prices before taxes of $300 - $500 per pound.
That is an 80-90% decline relative to current prices, which are about $2,000 per pound at farm gate in
Northern California and $3,000 - $4,500 per pound in wholesale markets around the country. (Poundlevel prices are more relevant than ounce prices for those smuggling commercial quantities, as opposed to
“drug tourists”.)
Sales taxes in California vary by jurisdiction, but 9% is typical. Proposition 19 mentioned no
specific marijuana tax rate; rather, it empowered local jurisdictions to set whatever rates they wished.
The policy debate in California anchored on $50 per ounce, or $800 per pound, perhaps because that
figure was mentioned in the Ammiano Bill.
A $50 per ounce excise tax is extraordinarily high on a per unit weight basis, equivalent to a $35
tax on a 20-gram pack of cigarettes (Caulkins et al., 2010). That is roughly 10 times higher than the
tobacco tax in high-end states, and even those rates generate considerable tax evasion (Lafaive et al.,
2008; Merriman et al., 2000; Merriman, 2010). So we judge it unlikely that taxes higher than $50 per
ounce would successfully be collected, and lower taxes are possible. Since Proposition 19 devolved rate
setting to local jurisdictions, it could have triggered a “race to the bottom” with jurisdictions vying to be
the most industry-friendly in order to get the benefits of hosting the industry. (For operational and
technical reasons a grow house based industry would be footloose; there are no physical constraints on
where it operates, so it would presumably gravitate to whatever jurisdiction was most hospitable.)
Hence, we examine implications of smugglers being able to acquire pounds of marijuana at prices
ranging from $300 per pound (low-end production cost, untaxed) to $1350 per pound (high-end
production cost, with sales and $50 per ounce excise taxes). $1200 per pound might be a fair point
estimate with a $50 per ounce excise tax collected, vs. $400 with no tax.
12
ANALYSIS FOR SINSEMILLA MARKET
If smugglers could obtain sinsemilla in California for $1,200 per pound and smuggling costs were
$400 per pound per thousand miles, then sinsemilla purchased legally in California and smuggled 2,500
miles to New York would cost $2,200. That is less than the price Narcotics News currently reports for
New York ($2,500 - $6,000 in New York City and $3,250 - $5,000 in Albany). Furthermore, comparing
prices dollar for dollar may be conservative if legally produced but diverted marijuana is perceived as
better than purely illegal sinsemilla, e.g., because its quality is less variable.
Parallel logic applies throughout the country, and the results are not subtle. Even with our highest
price in California ($1350) or our highest price gradient ($475), California produced marijuana would
undercut existing sinsemilla prices in every state. Indeed, even with both the highest price and the highest
gradient, that would still be true for every state except for Wisconsin.
It would appear that the only way sinsemilla producers outside California could stay in business
is by cutting their prices. It is not known by how much they could cut prices. Hence, Figure 2 plots
potential exports as a function of the amount by which diverted California sinsemilla would have to
undercut current prices to win market share. It is also not clear how much (in grams) the average
marijuana user consumes, even today let alone after legalization. So the vertical axis measures the
number of current past-month users for whom exports would be cheaper than current sources, relative to
the number in California. For example, Hughes et al.’s (2009) state-specific prevalence estimates imply
there are 2.4 million past-month marijuana users in California, and another 15.4 million elsewhere in the
lower 48 states, or 6.4 times as many outside California as inside. Hence, the line in Figure 3 starts at a
height of 640%.
To clarify how to read this figure, suppose one believed sinsemilla from California had to be
$1,000 per pound cheaper than the current price in order to out-compete the current suppliers. Then one
would look at $1,000 on the horizontal axis and note that the line above that point is at the level of 600%,
13
meaning that California exports would be the preferred source of sinsemilla for 6 times as many
marijuana users in the lower 48 states outside California as there are marijuana users in California.3
Figure 3: Export Market as a Proportion of California Market (vertical axis) as a Function of Margin by Which
California-Grown Sinsemilla Would Have to Undercut Current Prices to Win Market Share (horizontal axis)
(Drawn for Acquisition Costs of $800 per Pound, and Smuggling Costs of $400 per Pound per 1,000 Miles)
700%
600%
500%
400%
300%
200%
100%
0%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
The curve is “chunky” because analysis is done at the state not city level. It slopes downward
because the larger the margin by which taxed sinsemilla from California would have to beat current prices
in order to win market share, the fewer states there are where Californian sinsemilla would actually be
consumed, as opposed to merely exerting competitive pressure that drives down prices without actually
taking market share from current sources. Increasing the production cost in California, the tax in
California, and/or smuggling cost tends to pull the curve down and to the left. But within the parameter
ranges we consider, essentially the entire curve is always to the right of the vertical axis, indicating great
potential for California exports, even if they were taxed at $800 per pound.
14
ANALYSIS FOR COMMERCIAL GRADE/MEXICAN MARIJUANA MARKET
The analysis for the current commercial grade market is similar but with one twist, which we
again illustrate by thinking first of one specific state. Currently Mexican marijuana sells in Wisconsin for
about $1,075 per pound at the wholesale level. It is roughly 1,750 miles from Humboldt County
California to Wisconsin, so at a transport cost of $400 per pound per thousand miles, diverted California
sinsemilla would cost $1200 + $400 * 1.75 or roughly $1,900 per pound in Wisconsin.
The typical THC content of Mexican imports is 4–6 percent, whereas we expect legal California
production to be essentially all sinsemilla, whose THC content is now typically 10–18 percent (Kilmer et
al., 2010b). (Outdoor legal production might not all be sinsemilla, but we expect federal enforcement to
prevent brazen farming and, at any rate, outdoor production costs are very low, so costs per unit of THC
are even lower (Caulkins, 2010).)
So, in Wisconsin sinsemilla diverted from legal California production might cost 1.75 times as
much per pound as Mexican marijuana now does, but it would be 2–3.6 times more potent. To the best of
our knowledge, no one has examined empirically how marijuana consumers trade off price and potency.
We carry through the calculations initially assuming that it is price per unit of THC that matters, but vary
the potency ratio to recognize that other considerations may matter.
Replicating this analysis for the other states shows the results depend somewhat on whether any
excise tax is collected and what potency equivalence ratio is used so we mention results for several
combinations of those assumptions.
Suppose smugglers had to pay $1200 per pound for sinsemilla in California (e.g., because a $50
per ounce excise tax was collected before diversion) and incurred a $400 per pound per thousand miles
transport cost. Then the diverted California sinsemilla would be cheaper per unit of THC than current
commercial grade prices for 80% of marijuana users outside of California, but not those in Arizona,
Florida, Georgia, New Mexico, or Texas. If the price of sinsemilla in California fell to even $800 per
pound (e.g., a $25 per ounce tax), then it would be cheaper per unit of THC in every state except Texas.
If a gram of diverted California sinsemilla were only as desirable as 2 not 2.8 grams of Mexican
15
marijuana, then the all-but-Texas result would require prices in California to drop to $450 per pound, i.e.,
no significant excise tax is collected.
So one can identify conditions under which marijuana diverted from legal California production
would not out-compete current suppliers in some states. For example, if a substantial excise tax were
collected before diversion and users prefer to obtain THC from lower rather than higher potency types of
marijuana, then diverted California sinsemilla would be uncompetitive for an important minority of the
commercial grade market. In particular, with both a $1200 price and a 2:1 equivalency ratio, commercial
grade marijuana at current prices would be preferred by 40% of past-month users outside of California.
However, one can also see that glass as 60% full; even if both those conditions held, diverted California
sinsemilla would still undercut current prices for the majority of commercial grade marijuana users in the
U.S.
And if not tax were collected before diversion ($400 per pound purchase price), legalizing
marijuana in California would cut THC prices by one-third or more for everyone outside Texas, and most
of the country would see the price per hour of intoxication fall by 45 – 60%.
DISCUSSION
Based on seven different data sets, commercial grade marijuana prices in the U.S. appear to
increase by about $400 per pound per thousand miles of additional distance from Mexico. Assuming
arbitrage works well enough to make price gradients reflect actual transport costs, including the risks of
enforcement (Reuter and Kleiman, 1986; Caulkins and Reuter, 2010), that is then also a fair estimate of
the cost of smuggling marijuana within the lower 48 states.
Combining that figure with Kilmer et al.’s (2010a) estimate of marijuana production costs after
legalization, data on current marijuana prices, and plausible tax rates points to our principal finding:
Marijuana that is diverted from legal production – even after taxes are collected – would undercut current
marijuana prices throughout most of the U.S. In particular, they would undercut current sinsemilla prices
essentially everywhere, and on a per unit THC basis would undercut current commercial grade prices in
the great majority of the U.S. Hence, legalizing marijuana production in California would make it
16
economical to supply most cannabis consumption throughout the U.S. via marijuana diverted from legal
California production. This would create downward pressure on prices throughout the U.S. and so
presumably push up marijuana use, dependence, and other sequelae including drugged driving (Pacula,
2010). Thus one state’s decision to legalize would create consequences for the country as a whole.
The extent to which this happened would depend on details of the legalization regime. For
example, if producers were required to physically secure their production facilities and marijuana could
only exit the premises in small lot sizes bearing a stamp verifying payment of a sizable excise tax,
diversion would be more difficult. And if suppliers were held accountable for documenting that all the
marijuana leaving their premises was sold by legitimate retailers within California, with forfeiture of land
and capital assets as a penalty for failure to do so, diversion might be riskier and more difficult than
straight up illegal production. However, if such issues are not attended to with some care, then producers
may be able to sell to brokers who claim to be supplying legitimate retail operations inside California
when in reality they are diverting some to smugglers who (illegally) take the marijuana out of state.
This paper was motivated by California’s near passage of Proposition 19 in November 2010, and
the analysis was done from the perspective of California being the state that legalized production.
However, the same result would hold for any state legalizing marijuana, because production cost
estimates were based on indoor growing which can be done anywhere. Indeed, California is a relatively
uneconomical place for indoor growing inasmuch as it has unusually high prices for two of the larger
factors of production: residential housing and electricity (Caulkins, 2010).
Marijuana exports could benefit a state that legalizes if other states do not follow suit. That one
state would get the job creation and possibly production tax revenues from supplying the entire country,
while most of the adverse consequences of greater use would accrue outside its borders; even for the
largest state (California), there are six times as many marijuana users elsewhere in the lower 48 as there
are instate. This has at least three policy implications. First, a selfish state wanting to play that game
ought to impose taxes on marijuana producers, not retailers. Second, the other states would not be
disinterested bystanders; their marijuana markets would be affected, perhaps dramatically, by any one
17
state’s legalizing production. Third, depending on one’s beliefs concerning the social benefit or cost of
greater marijuana use, state-level legalization could be viewed as a Prisoner’s Dilemma; everyone would
be better off if no one legalized, but it is in any individual state’s interest to legalize. So some might view
a tough federal response that deters states from legalizing (e.g., withholding federal highway dollars from
any state that legalizes marijuana) as a welfare-enhancing tool for keeping the states in their preferred
cooperate-cooperate strategy, a position which otherwise would not be a stable equilibrium.
It is important to close by stressing that any projection related to legalization is subject to great
uncertainty. Much could depend on technical details of the regulatory regime governing legal production.
Also, we do not believe the federal government will stand idly by if one state were to capture the entire
national marijuana market, although we cannot predict what or how effective the federal government’s
reaction would be. So we think of Section 3’s analysis as projections that raise provocative questions,
rather than as forecasts or predictions. But at a minimum they underscore that the nation as a whole, not
just individual states, will likely be grappling with marijuana legalization in coming years.
NOTES
1
2,000 miles driven times $0.50 per mile = $1,000 for gas, oil, depreciation, etc. Six person days
times $125 per day wage plus $50 “per diem” for meals equals roughly another $1,000. Hotel bills
could be roughly $200 - $500 depending on the hotel and whether the two conspirators share a room.
2
Note there is an argument whereby reductions in production cost could reduce smuggling costs,
although ignoring this possibility is conservative with respect to our overall conclusion. Quantity
smuggled on a single trip may be limited more by dollar value than by vehicle capacity. If so, then
halving the cost in California might double the amount that can be carried on a particular smuggling
trip, thereby halving the tangible cost per pound per thousand miles. Compensation for law
enforcement risk would fall, but not by so much; the risk of making one trip with 100 pounds might
be smaller than the risk of making two trips with 50 pounds each, but it is greater than the risk of
making one trip with 50 pounds.
18
3
NN only provided sinsemilla price data for 22 states; other states were assigned the price observed in
their nearest neighbor. When such states are roughly equi-distant from California, the curve jumps
down by the combined population of all those states for roughly the same price difference on the
horizontal axis. Finer-grained data on current sinsemilla prices would create a smoother curve, but
not change its location.
ACKNOWLEDGMENTS: This work was part of a larger endeavor projecting consequences of
California legalizing marijuana. The co-authors of that larger project, Beau Kilmer, Rob MacCoun,
Rosalie Pacula, and Peter Reuter, offered useful comments and suggestions on this work.
REFERENCES
Bond, B.M., & Caulkins, J. P.
2010
Potential for legal marijuana sales in California to supply rest of U.S. Santa Monica, CA:
RAND.
Caulkins, J.P.
2010
Estimated Cost of Production for Legal Cannabis. Santa Monica, CA: RAND.
Caulkins, J.P., Morris, E., & Ratnatunga, R.
2010
Smuggling and Excise Tax Evasion for Legal Marijuana. Santa Monica, CA: RAND.
Caulkins, J.P., & Reuter, P.
2010
How Drug Enforcement Affects Drug Prices. In M. Tonry (Ed.), Crime and Justice – A Review
of Research, vol. 39. Chicago: University of Chicago Press, pp.213-272.
Clements, K.W.
2004
Three facts about marijuana prices. Australian Journal of Agriculture and Resource Economics,
48(2), 271-300.
Hughes, A., Sathe, N., & Spagnola, K.
19
2009
State Estimates of Substance Use from the 2006-2007 National Surveys on Drug Use and Health.
Office of Applied Studies, Substance Abuse and Mental Health Services Administration, NSDUH
Series H-35, HHS Publication No. SMA 09-4362. Rockville, MD: SAMHSA.
Kilmer, B., Caulkins, J.P., Pacula, R.L., MacCoun, R., & Reuter, P.
2010a Altered State? Assessing how marijuana legalization in California could influence marijuana
consumption and public budgets. Santa Monica, CA, RAND.
Kilmer, B., Caulkins, J.P., Bond, B.M, & Reuter, P
2010b Reducing Drug Trafficking Revenues and Violence in Mexico: Would Legalizing Marijuana in
California Help? Santa Monica, CA: RAND.
Jacobson, M.
2004
Baby Booms and Drug Busts: Trends in Youth Drug Use in the United States. Quarterly Journal
of Economics, 119(4), 1481-1512.
Lafaive, M., Fleenor, M., & Nesbit, T.
2008
Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review. Midland,
Michigan: Mackinac Center for Public Policy.
Leggett, T.
2006
A review of the world cannabis situation. Bulletin on Narcotics, Vol. LVIII, Nos 1 & 2.
Merriman, D.
2010
The Micro-Geography of Tax Avoidance: Evidence from Littered Cigarette Packs in Chicago.
American Economic Journal: Economic Policy, 2, 61-84.
Merriman, D., Yureleki, A., & Chaloupka, F. J.
2000
How big is the worldwide cigarette smuggling problem? In P. Jha, & F. Chaloupka (Eds.),
Economics of Tobacco Control - Tobacco Control in Developing Countries. Oxford: Oxford
University Press for the World Bank and World Health Organization.
National Drug Intelligence Center
20
2009
National Drug Threat Assessment: 2009. Retrieved June 11, 2010, from
http://www.justice.gov/dea/concern/18862/ndic_2009.pdf.
Pacula, R.L.
2010
Examining the Impact of Marijuana Legalization on Marijuana Consumption: Insights from the
Economics Literature. Santa Monica, CA: RAND.
Paoli, L., Greenfield, V., Charles, M., & Reuter, P.
2008
The global diversion of pharmaceutical drugs. India: The third largest illicit opium producer?
Addiction, 104, 347-354.
Reuter, P. & Caulkins, J.P.
2004
Illegal Lemons: Price Dispersion in Cocaine and Heroin Markets. Bulletin on Narcotics, Vol.
LVI No. 1-2, pp.141-165.
Reuter, P., & Kleiman, M.A.R.
1986
Risks and Prices: An Economic Analysis of Drug Enforcement. In N. Morris and M. Tonry (eds.)
Crime and Justice: An Annual Review of Research Volume 7, pp.289-340.
U.S. Dept. of Justice, National Institute of Justice.
Various years. ARRESTEE DRUG ABUSE MONITORING (ADAM) PROGRAM IN THE UNITED
STATES, ICPSR version. Washington, DC: U.S. Dept. of Justice, National Institute of Justice
[producer]. Ann Arbor, MI: Inter-university Consortium for Political and Social Research
[distributor].
21
APPENDIX: DESCRIPTION OF DATA SOURCES
The Narcotic News (NN) website appears to be a private undertaking that, in its own words “is
designed to appeal to Law Enforcement personnel and all others who have a desire to read about the latest
news in cocaine, marijuana, heroin, methamphetamine, etc. In addition we will post news articles relating
to large cash seizures and hidden compartments that are used to conceal dangerous drugs. The goal of this
site is to bring awareness to the worldwide drug problem.” NN does not describe its methods of data
collection or authentication. They appear to be intended to reflect voluntary self-report by law
enforcement agencies. The site invites “If you are involved in law enforcement and would like to submit
the going prices for your area, please email us at [email protected]”.
The site lists wholesale price ranges for a pound of marijuana, organized by state and city. Prices
are usually given as ranges, of which we took the midpoint. Some are supplemented by parenthetical
descriptions (such as “High Grade”); no date information is given. We separated those reported to be
sinsemilla or high grade (n=22) from the others, assumed to be commercial grade (n=126). The 22
sinsemilla or high grade entries were not enough to support analysis of price as a function of distance
from source, but were used for the current price when estimating the potential export market.
The U.S. Department of Justice’s (DOJ) National Drug Intelligence Center (NDIC) publishes
Drug Market Analysis reports (http://www.justice.gov/ndic/) for approximately 32 regions (depending on
the year). The most recent (2009) collection of reports included wholesale (pound) prices for Mexican
marijuana in only four states, so we combined data from past reports, taking midpoints of ranges,
averaging across cities within a state, and averaging across years. Average prices vary with distance from
Mexico, from $375 per pound in New Mexico to $1,725 per pound in Minnesota. The last is influenced
by a 2001 report of $2500 - $3000 per pound which probably actually pertains to sinsemilla, but since no
formal retraction has appeared we retain it in the analysis but check its influence on the results.
We obtained all 311 STRIDE purchase observations that were denominated in grams (FORM =
GMS) and involved purchases of 950 grams or more between 2005 and April 2009. There were 82
marijuana purchases of roughly 1 – 9 kilograms. We dropped one observation labeled “THC” (rather
22
than “Cannabis”), the observation from Alaska, ten with prices below $250 per pound, and 15 with prices
over $2,000 per pound (presumably sinsemilla), leaving 55 observations spread over 25 states.
The DEA IDPPR data were originally published in hard copy reports (Domestic Cities Reports,
1982-1985; Illicit Drug Wholesale/Retail Price Reports, 1985 – 1990; and Illegal Drug Price/Purity
Reports, 1991-1998). They were assembled for another project and are described by Pacula et al. (2001).
The data include 1,369 quarterly observations (4th quarter of 1982 through 2001) of pound and ounce
level prices for sinsemilla and commercial grade marijuana, usually expressed as a range, for one of 20
cities (and the nation as a whole, but national data are not useful here). Annual prices were computed by
averaging midpoints of the quarterly ranges for any location-year with two or more quarters of data,
yielding 282 observations covering 1986 – 2000. Note: the STRIDE data come from 2005 – early 2009,
so they do not overlap with the time period covered by the DEA IDPPR reports.
The Arrestee Drug Abuse Monitoring Program (ADAM) is a federally-funded monitoring system
that interviews and collects urine samples from arrestees quarterly in a number of cities around the U.S.
(US DOJ, various years). The ADAM data contained 25,308 observations from 2000 – 2003 and 43
locations. Each observation included the city, year, quarter, amount paid, number of units, and type of
units (e.g., gram, ounce, etc.). We focused on the 15,709 observations whose units were pound, ounce,
gram, or joint, and excluded those whose units were ambiguous (bag, “other”, “don’t know”, etc.).
The ADAM data appeared to be contaminated by outliers, so we regressed log of amount paid on
log of weight and dummy variables for time and city. We removed the 431 observations whose value was
more than 2.5 standard deviations away from the regression line.
The “fanzine” High Times allows contributors to the "Trans High Market Quotations" (THMQ)
section to submit descriptions and prices of marijuana in their part of the country. These data are
described by Jacobson (2004), who provided us with the data. Briefly, the data consist of 2157 prices
submitted to High Times from 1996-2005 for an ounce of schwag (n=490), mids (244), or sinsemilla
(1422). Prices tended to be lowest for schwag (average $111 per ounce), highest for sinsemilla (average
$360) and intermediate for mids ($182). We focused on schwag as the grade most likely to reflect
23
Mexican marijuana prices – although after having made that choice we also investigated mids prices and
found that they are even (slightly) more strongly correlated with distance from Mexico.
Plots of price vs. distance suggested there were outliers on the low side that might be obscuring
the relationship between price and distance, so we conducted the analysis both with all observations and
after deleting (“trimming”) observations with prices equal to or below $50 for schwag (and $100 for
mids). We also retained only states for which there was more than one data point, and used the average
across those data points. This left 44 states for schwag (and 35 for mids).
The new website priceofweed.com posts submissions from anonymous users by location, and
price paid per ounce of high, medium, or low grade marijuana. They also survey users on “social
metrics”, registering how users view the social acceptance of marijuana use and the emphasis on law
enforcement in their area. Their first price submissions were posted on September 2, 2010 and by
September 15, 2010, over 3,000 submissions had been posted. Priceofweed posts running averages for the
price of high, medium, and low quality marijuana for all 50 U.S. states as well as 13 Canadian provinces,
as well as what seems to be every individual submission, although their companion blog
(http://priceofweed.tumblr.com/) says that outliers are removed before averaging. The number of
submissions changes in real time. As of December 7, 2010, the date we downloaded the prices used here,
there were 869 observations for low quality marijuana. They covered all of the lower 48 states, except
Montana, although three other states had suspiciously high averages based on only a few submissions
(North Dakota-3, South Dakota-3 and Wyoming-6).
24