Legal Marijuana Cutting into Drug Cartel’s Business

New evidence has come out regarding the impact of legalized marijuana on the drug trade, and it’s good news for just about everyone–everyone except the Mexican drug cartels. Just two years after legal recreational marijuana sales began in Colorado and Washington in 2014 (Oregon and Alaska joined later), the Mexico marijuana industry is already feeling the pinch. Prices are down, quality is up, and the number of marijuana seizures at the US-Mexico border were at their lowest level in a decade in 2015.

This outcome may sound strange at first glance, but it’s precisely what economic principles would predict. To understand this, we first have to realize that marijuana prohibition isn’t actually a categorically bad thing for marijuana suppliers. Yes, it makes their business model illegal, but this is a mixed bag. On the one hand, it clearly raises the costs of their business, as they have to take various precautions to avoid getting caught. However, it also keeps out competition from legitimate businesses, making their product more scarce. This, in turn, allows them to charge higher prices. Additionally, the black market nature of the transactions would also allow the cartels to do more price discrimination than other businesses. Most customers won’t be able or willing to compare prices among a lot of different suppliers, and this also tends to give an upper-hand to the marijuana sellers.

There is also a demand-side effect here. Certainly, there are some people that will be unwilling to do pot precisely because it is illegal. But the dramatic growth in pot use in the US over time suggests that this deterrent effect is not nearly as strong as lawmakers might hope. (And note that the study in that link referred to 2012-2013, before the recreational legalization laws took effect.)

The net effect of the above rules is that production will shift to places with laws that either more relaxed or less well-enforced–or places where the local authorities can be readily bribed to look the other way. In other words, prohibition would tend to shift production to places like Mexico. And since the entire enterprise is already illegal and cannot use the court system to settle disputes, the most violent organizations will come to dominate the industry. Instead of driving their competition out based on superior quality or pricing, they drive them out with force. The customers suffer, but the businesses that do survive make a killing. (Sorry about that.)

When you legalize pot, the above effects are reversed. There’s no reason to import pot from Mexico to Oregon, if you can already purchase it locally. And as long as complying with the regulations is not too onerous, most people will make the calculation that it’s worth making your supply chain fully legal to avoid the risks of legal consequences. Just as important, the barriers to entry for new competitors get reduced dramatically. Once the exclusive province of (mostly) criminals and hippies, marijuana production has become a lucrative business enterprise for anyone to try their hand at. The result is more professional production practices and economies of scale that couldn’t be achieved by people that had to hide their operation from the authorities.

Best of all, legal businesses will compete on who can provide the best price and quality rather than who can engage in the most gratuitous violence.

Of course, there is a chance that one byproduct of cheap, high-quality marijuana is that it will lead more people to use the drug. But this is not a serious problem. Most of the problems associated with illicit drug use derive precisely from the fact that the drugs are illegal. Yes, some drug deals end in violence. But this is precisely because they can’t in court. Some illegal drugs are also highly addictive and harmful to one’s health. And we think of this addictive quality as driving people to take desperate, often violent measures, like theft or robbery, to get a fix. Fair enough, but cigarettes are also deeply addiciting. How many stories have you heard about a tobacco junkie trying to rob someone for his next packet? I’m guessing not many. Moreover, there’s a flourishing industry focused on producing over-the-counter treatments designed to help people get over their addiction to tobacco. People can buy them cheaply, discreetly, and without judgment. Meanwhile, if someone wants to get help for an addiction to illegal drugs, they have to begin by, in effect, acknowledging they are a criminal.

Drug prohibition is a clear example of how the cure can sometimes be worse than the disease. And it doesn’t achieve its stated purpose anyways. At least in the case of marijuana, demand has been growing not shrinking in recent years. Making something illegal does not make it unwanted. So even if we did want to impose our arbitrary definition of morality on the rest of America and keep marijuana illegal, the reality of human nature would ensure our failure–certainly on pot, and probably on just about every other vice as well.

There are many compelling arguments against drug prohibition. Libertarians would correctly describe marijuana sales or usage as the epitome of a victimless crime, and suggest we shouldn’t make laws against behavior that does not infringe on anyone else’s rights. Many others would note the racially disproportionate nature of drug law enforcement, and might reasonably argue that the institutional racism built into the drug war is enough to justify its repeal.

But even if you don’t find these moral arguments compelling, economics and pragmatism should still convince us all to favor legalization. The relevant question here is not whether we think using marijuana (or other drugs) is a good idea; it will be used regardless. So the real question is whether we would prefer the drug trade to benefit enormously violent criminal organizations or nonviolent, tax-paying businesses. I’ll let you answer that for yourself.

In short, this new evidence is exactly in line with what economists and libertarians would have predicted all along. The end of the War on Drugs will also be the end of the drug cartels. Let us hope it comes soon.

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