Washington more successful than California in crowding out the pot black market

A new report shows that Washington, which legalized recreational marijuana in 2012, has ousted the black market much more successfully than California, where voters approved legalization in 2016. In a 2021 International Cannabis Policy Study (ICPS) survey, 77 percent of cannabis users in Washington said they had purchased “any type of marijuana” from a “store, co-op, or dispensary” in the past year, while 17 percent said they purchased weed from a “dealer.”

The proportion of consumers in Washington who say they have purchased marijuana from a “store, co-op, or dispensary” is higher than the average for states that have legalized recreational use in 2021, according to a statewide ICPS survey was 57 percent. Washington’s Liquor and Cannabis Board (LCB) paid for the ICPS report on cannabis use in that state, and the ICPS has not released California survey data. However, calculations based on estimated total use and legal sales suggest that the black market accounts for between two-thirds and three-quarters of marijuana purchased in California.

California’s notable failure to shift consumers from illegal to legitimate retailers is largely due to a combination of high taxes, onerous regulations, and local retail bans. While Washington has a relatively high marijuana retail tax (37 percent plus standard sales taxes), the state has made it easier for licensed suppliers to compete with illegal sources in other ways.

A 2022 study by the Reason Foundation (which publishes reason) notes that local restrictions in California have created “vast cannabis deserts” where “consumers cannot access a legal retailer within a reasonable distance of their homes.” Washington has more than three times the number of retail pharmacies per capita than California.

In her book Can legal weed win?, University of California, Davis economists Robin Goldstein and Daniel Sumner report that prices for “low-end” marijuana in Washington are among the cheapest in the country. “Low-end retail prices in California are more than double low-end prices in Washington state,” they note. Goldstein and Sumner describe Washington as a state with “relatively light regulation” and add that there is “no clear reason that Washington state costs would be lower if the differences were not based on regulation.” Finally, “production costs for other crops where markets are integrated — such as grapes, apples, and blueberries — are similar across states.”

Data from the ICPS survey of cannabis users shows that legal marijuana is generally cheaper than illegal marijuana in Washington. In 2019, the average price for dried flowers purchased from legal retailers was $6.06 per gram, compared to $7.01 for pot purchased from unlicensed retailers. According to survey data, the gap has since widened: in 2021, the average legal price was $6.51 per gram, compared to an average illegal price of $13.58, a sharp increase from $8.04 in 2020.

These prices are based on purchasing different quantities and the price per gram will be lower for larger quantities. At Uncle Ike’s in Seattle, for example, you can buy seven grams (about a quarter ounce) of Rozay Cake flower for $40.50, which is $5.79 per gram including tax. Overall, according to the ICPS reports, marijuana is cheaper in states that have legalized recreational use, and prices in Washington are lower than the average for those states.

“When Washington’s first LCB-regulated retail stores opened in July 2014, the price was significant[y] higher than [it was in] illicit market because legal demand exceeds legal supply,” LCB Director Rick Garza said in a press release. As more stores opened, the price fell steadily month-on-month before stabilizing over the past five years.”

Ian Eisenberg, co-owner of the Uncle Ike’s chain, agrees that licensed retailers in Washington were able to compete on price with illegal sources. Even with a high retail tax, he says, “our pot is arguably the best and cheapest in the country.” He thinks it’s plausible that licensed retailers account for about three-quarters of marijuana sales in Washington.

Eisenberg attributes the state’s success to two main factors. Unlike California, Washington’s medical marijuana industry has never been blessed by state legislation, making it easier for newly licensed recreational traders to take over the market. And because Washington prohibited vertical integration, there was “massive processor-level competition to get to stores from the get-go, and a lot of price competition.”

Regulatory differences aren’t the only reason marijuana prices are lower in Washington. “In the absence of specialized constraining resources (such as outlandish terroirs),” write Goldstein and Sumner, “competition, economies of scale, technology, consolidation, and other efficiencies rapidly drive down costs as markets evolve — even if taxes and regulations remain costly. Since Washington legalized marijuana four years before California, those efficiencies have had more time to unfold.

“Some costs in the legal weed market will certainly come down over time as companies learn how to efficiently comply with regulations,” say Goldstein and Sumner. “It is possible that legal cannabis production will eventually reach a level of sophistication that will allow it to overcome taxes and regulations through efficiency. Such efficiencies could allow legal cannabis to compete in price with unlicensed cannabis. Such a convergence could occur in Colorado and Washington, where legal flowers at the lower end of the price spectrum are now sold wholesale for less than $300 a pound.” But Goldstein and Sumner argue that tax and regulatory reforms would speed up the process.

“We’re often asked about the impact Washington’s regulated marketplace has had on the illicit market,” says Garza. “This study is the first known to us to show the extent to which consumers in Washington prefer licensed cannabis retail outlets to illegal sources. It shows that the legitimate market we have is working largely as it should. This is testament to the testimony of voters who approved the initiative 10 years ago and the fact that ever since [then] Our political leadership, including the governor and lawmakers, the LCB and industry, have worked to follow the will of the electorate and create a safe, well-regulated system.”