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High Prices

Lessons from the marijuana market.

Apr 15, 2013, Vol. 18, No. 29 • By JOSHUA GELERNTER
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The economist Leonard E. Read once explained the effectiveness of free markets with the parable of the pencil: Pencils seem simple enough, just some wood with graphite inside and a bit of rubber at the end​—​but, he said, “no one in the world knows how to make a pencil.”

Tax-free tokin’ in Seattle—for now

Tax-free tokin’ in Seattle—for now

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To get the wood you have to harvest trees, which requires tools, which requires steel, which requires iron ore, and so forth. To get the graphite, you have to mine some things and do chemistry to them. To make the eraser you have to get rubber from the South Pacific, ship it over here, get some glue and a brass joining strip, stick them on the end of the pencil​—​and then, of course, you still have to paint the thing yellow. It’s very complicated, Read said, and with the tree-cutter toolmakers, miners, and everyone else, thousands of people are involved. But the end result is available for a dime at any drugstore, and the entire process emerged without any government planning.

With thousands of new regulations spilling out of government agencies, it’s a good time to reflect on what private citizens can get done on their own. On its busiest day of the year, UPS delivered 300 packages a second, at a profit, while the USPS was fighting off bankruptcy, again. SpaceX was getting ready to make another private delivery to the International Space Station, while NASA was booking flights on Soyuz. New York City was banning 32-ounce drinks while private citizens were inventing bacon-flavored soda.

Last November, two of our states​—​Colorado and Washington​—​asserted their independence from federal regulation by legalizing recreational marijuana. Of course, lots of Americans​—​42 percent of them​—​have, at one time or another, smoked marijuana, whether it was legal or not. And that presents us with a remarkable and underappreciated, pencil-esque demonstration of the effectiveness of markets.

Without any government assistance​—​indeed, despite the government doing its best to thwart the trade​—​anyone, anywhere in the country can get marijuana. And it’s not difficult. If, like me, you’re in your early 20s, plenty of people you know smoke marijuana and would be happy to introduce you to a dealer. If you’re older, you can make the connection through your friends or your friends’ friends, or your kids or your friends’ kids. But no matter where you are, a supplier can be found: A website called priceofweed.com allows users to submit records of their recent marijuana transactions​—​those records show people are buying and selling in every corner of every state in the union. The price varies, but on average marijuana is cheapest in California and the Pacific Northwest, and most expensive in the Dakotas and New England; taking the country as a whole, you can get a gram of weed for about 10 dollars. A gram is estimated to be good for 5 or 10 beers’ worth of intoxication.

So, with not very much effort, for not very much money, anyone can flout the law and avail himself of a thriving, extragovernmental enterprise. The underground grass game shows us (one more time) that where a demand exists, a supply will appear, no federal subsidy required. And since the transactions are voluntary and not burdened by excessive regulation, the price settles at a point where the seller and buyer are both pleased, and (I am told) a good time is had by all.

People speculate that legalization will drive the price of marijuana down​—​one journalist guessed it would end up at about 20 cents a pound. Because, after all, cannabis is a hardy plant that doesn’t cost much to grow​—​how expensive could the final product be, when no one needs to hide from the DEA anymore? But, of course, the same can be said of tobacco. Legalization would undoubtedly reduce the cost of production, but don’t be sure it’ll reduce the cost of sale: After all, in New York City, a pack of cigarettes​—​20 paper tubes filled with dried leaves​—​costs a mind-boggling $15.

Once a share of all marijuana sales is given over for depressing health advertisements and punitive taxes, who knows what the price will be? For the moment it’s low in Washington and Colorado, but the regulation debates have just begun. Everyone believes that legalization will make buying marijuana more convenient. But who can be sure? What if legalization means potheads have to forgo the convenience of home delivery for schleps to government authorized distributors? Maybe they’ll have to remember to bring their drug smoking licenses. (Probably not. But not long ago all guns were sold over-the-counter.)

And when legalization comes, taxes won’t be far behind. The Washington state initiative was passed amid estimates that legalized pot would soon bring the state over half a billion dollars in new tax revenues. Pro-legalization congressmen like Earl Blumenauer of Oregon have already touted the idea of federal marijuana excise taxes that would bring in billions to Washington, D.C.

The irritating burdens of the modern state mean that legalization—with its attendant regulations, taxes, and federal oversight—may do more to discourage marijuana smoking than scattershot law enforcement does now.

Joshua Gelernter is a writer in Connecticut.

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