Will legal cannabis ever shut down the black market?
Legalization is spreading across North America and the world, muscling in on growers and dealers that have been operating under the radar for decades. A recurring theme in the debate about legalization of cannabis tends to double back to the question of the black market. Some pro-cannabis activists say legalization is the best way to kill the black market, but others aren’t so sure. Will legalization end the black market?
To determine what is likely to happen to the cannabis black market should national legalization occur, it helps to look at all the surrounding issues:
Let’s start with basic economics. The building blocks of any microeconomic transaction are supply and demand. The demand for cannabis has already created a substantial black market in the United States. In theory, a legal market that served the same demand would drive down the use of black-market goods because consumers would enjoy legal benefits, like added protections, regular hours and well-tested products; all procured in a safe environment.
But that’s only in theory. In practice, it takes more than a legal market to stop a black market. After all, there are still street vendors who trade cash for fake sunglasses and T-shirts in Times Square, despite their legal availability nearby.
Some critics have even pointed to the flourishing of black markets in legalized states, like Colorado and Washington, as proof that legal status doesn’t stop the black market. While that’s technically true, it’s a bad-faith argument. It’s the same with Cuban cigars. There’s a black market for cannabis outside of legalized states, so the “black markets” that exist in legalized states come from buyers who serve consumers outside state lines.
Don’t forget that states with legalized cannabis sell quite a bit of it. Last year alone, Colorado sold $1,507,702,219 worth of cannabis to consumers, according to the state’s Department of Revenue. That’s over a billion dollars that did not go into the black market. No matter what business you’re in, when a competitor puts up those kinds of numbers just three years in to their operation, you’re probably in trouble.
Black Market Competition
What’s more likely to happen to the black market is what happens in any free market: competition. Black markets operate in shadowy ways in part because it’s difficult for consumers to accurately price competition. Customers who look to buy illegal goods cannot advertise their intentions and often sacrifice bargain shopping for a guaranteed product. If a dealer has the goods now, it can make more sense to buy at an inflated price than to hope to find a competitor so soon. A legal market erases that from the picture.
Although regulated cannabis includes taxes, it will also be able to advertise deals and products and offer incentives (like easy purchasing and reliable hours). Black market dealers will be hard-pressed to compete against that, although they do tend to offer delivery and sometimes superior products. Dealers will have to compete on price alone, which can be a hard business model to sustain. There’s a reason Wal-Mart and Amazon.com put mom-and-pop competitors out of business. Bigger, legal shops can create profit thanks to economies of scale, which can be out of reach for small-market operations.
Black Market Advantages
But, just because legal operations may have some upper hands doesn’t mean black markets will disappear. They have market advantages of their own. For example, black markets already have an established and loyal customer base. And, with legalization comes new outlets for dealers to find suppliers — often the very same suppliers who grow for dispensaries. Buying excess goods for cash could lower the price dealers pay, allowing them to pass savings along to their clients. They also may be able to operate more openly than they did in the past, despite still partaking in an illegal operation.
There’s also the real possibility that dispensaries won’t be able to accurately match supply with demand, opening a space for the black market to fill. Take Canada, for example, where recreational cannabis will become legal in a matter of days. The government of Ontario has licensed 40 retail outlets to sell cannabis, which some estimates ranks as far too few to keep up with the number of people who would like to partake in legal cannabis.
Conclusion: The Black Market Will Probably Never Die
The truth is that legalization probably won’t do away with the black market. But, legalization will change how the black market operates. And, moving forward, it’s likely to shrink the size of the operation by massive amounts. However, this depends on people being able to access the products they want: high quality consumables that are prepared as preferred. This includes edibles, dabs, tinctures, oils, etc…all of which have varying levels of legality depending on geography.