The U.S., Mexico, and Cheap Legalized Pot

By Keith Humphreys 
Alejandro Hope makes the interesting observation that although the official marijuana legal regime is different between the U.S. and Mexico, growers in both countries operate in a grey zone between aggressive prohibition and full legalization. Growing is legal at the state level in much of the U.S. and illegal everywhere in Mexico, yet:

U.S. growers and distributors face a far greater risk of going to jail than their Mexican counterparts. In 2012, 92,000 persons were arrested in the United States on charges of marijuana production and/or sale. By way of contrast, in 2014, Mexican federal authorities opened 2109 investigations related to the production, transportation, trafficking, and commerce of all illegal drugs.

Alejandro also notes that the greater risk of arrest in the U.S., coupled with higher land and labor costs (and I would add, water costs) produces an eye-popping pot price differences:

farm gate prices for commercial grade marijuana in the mountains of northwestern Mexico can sell for as little as $6 dollars a pound. In Mendocino County, California, growers can get around $800 dollars per pound of high-grade sinsemilla weed.*

In both countries, pot is pretty cheap these days in absolute terms despite the added business costs that stem from some degree of illegality. If the U.S. legalizes completely, U.S. prices will fall dramatically. It is not fanciful at all to imagine that a joint could sell for a dime eventually, barring minimum unit pricing legislation or enormous excise taxes (ad valorem taxes don’t matter much, even a 50% tax would be inconsequential if pot were 10 cents a joint).

This raises an interesting question: If the U.S. legalizes, would Mexico follow suit and start a cheap, mass market marijuana industry that undercuts the prices of U.S. producers? If legal U.S producers can make a 10 cent joint, a legal Mexican producer should be able to make 5 or 1 cent joint. A common rejoinder to such speculation is that consumers will insist on high-grade, boutique U.S. marijuana from “branded” places like Mendocino County, much as they insist on craft beer rather than Budweiser.

This argument will resonate with journalists, college professors, policy wonks and other educated middle class types who drink craft beer, but remember, after the best year in its history, craft beer has has reduced the share of the market taken up by mass market beer to a paltry….89%. When most people outside the chattering classes reach for beer, it’s cheap, mass market product. The same could easily happen with pot, and under legalization Mexican farmers could be extremely competitive in that market.

*Internet users skew upmarket, so I know some readers will think this estimate is way too cheap based on their own buying experiences in posh dispensaries. So let me confirm from recent conversations with Humboldt County sinsemilla farmers: they got about $800 per pound in the last growing cycle and are selling for a price in the same general range right now ($1100/pound, give or take).