Wednesday, July 15, 2009

Is legalization good for pot farmers?

The Board of Equalization has made an interesting assessment of the potential revenue from legalizing, regulating, and taxing marijuana. Report is here. It estimates potential tax revenue of $1.4 billion, but the report is even more interesting for some of it's other information.

According to the report titled Marijuana Production in the United States (2006), an estimated 22.3 million pounds of marijuana was grown in the U.S. in 2006 with a value of $35.8 billion. California was the top producing state; it produced 8.6 million pounds with a value of $13.8 billion.

This estimate is based on numerous assumptions, all of which come from law enforcement estimates and academic studies. The most significant ones are as follows: • Legalization of marijuana would cause its street price to decline by 50 percent. • This 50 percent decline in price would lead to additional consumption of 40 percent. • The imposition of the $50/ounce tax would then lead to reduced consumption of 11 percent.

This esimate doesn't tell you whether it is economically efficient (that wasn't the point of the study), but we can make some guesses. It is good for state revenue by raising revenue and cutting law enforcement costs (although presumably bad for corrections jobs). I think it is pretty clearly good for pot smokers due to the reduced cost, and risk of criminal activity. The question is the impact on non-pot smokers (are they harmed by more pot use around them or perhaps better off due to state revenue and law enforcement focus on other things).

There is also the interesting question of the impact on pot growers and retailers. This isn't a small question if it is really a $14 billion industry producing almost 40% of the U.S. supply. To put that $14 billion in perspective, all of California agriculture was about $33 billion in 2006. Milk was $4.5 billion, grapes were $3 billion, almonds $2.25 billion, lettuce $2 billion, strawberries and tomatoes about $1.2 billion each. Put them all together, and it is about the same as this estimated value of local pot production. However this probably isn't a fair comparison, because presumably the $14 billion in pot is valued at the retail/street level not the "farm" level. With the 50% predicted decrease in price, it suggests that selling costs of pot are pretty high. Still if only 20% of price goes to growers, it is still as big as grapes.

They estimate the price will drop by 50%. That will cut producer and seller revenue, but what impact will legalization have on their costs. Also, the majority of California pot is currently grown for export to non-legal markets. How will this impact exports, both prices and quantities? Local demand is expected to grow due to lower price and legality, will this cause increased local production or will the extra supply come out of exports?

It isn't clear what all the impact of this will be on growers/sellers of pot? I suspect that most current sellers are opposed to legalization and growers probably have mixed opinions. Presumably someone has studied it, but I'm not aware of it.

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