Why does decriminalisation/legalisation not reduce the cost of drugs?

Question

It is conventional wisdom that the criminalisation of the supply of recreational psychoactive drugs causes an increase in the cost to supply and therefore to the user. In an unreferenced but somewhat intuitive statement:

According to multiple economic analyses, current marijuana prohibitions raise the cost of its production by at least 400 percent; the resulting higher prices help hold down rates of usage.

However other studies have indicate this is not the case, according to one frequently referenced study from 2016 (though relating to harder drugs):

We find that (retail) prices of cocaine and opiates did not decrease following the drug decriminalization [in Portugal]. Therefore, drug decriminalization seems to have caused no harm through lower illicit drugs prices, which would lead to higher drug usage and dependence. This evidence contrasts with the commonly held belief that drug decriminalization would necessarily lead to a dramatic increase in usage rates.

With the prevalence of marijuana legalisation and darknet markets it is easy to do direct comparisons online. Comparing prices for delivery between San Francisco dispensaries (which are legal at the state level and face significant competition) and darknet markets (which are illegal at state and federal level) we see that prices are similar for quantities of 1g – 3.5g and about half the price on the darknet for quantities of 14g – 28g. Results are similar for Amsterdam, with a greater price differential in favour of illegal supply for lower quantities and less difference at the 28g level. I am not including links here, but these numbers are easy to check (but I suggest you use tor if you do so). Anecdotal evidence indicates that quantity is at least as high on the darknet.

Excise tax is used to increase prices of such products, but it seems this is only 15% in California, so does not explain the price difference, let alone the absence of a reduction in cost due to legalisation.

Why is it that the predicted reduction in prices has not occurred?

Answer 1

Economics is hard

The number of factors that can impact supply and demand, and therefore pricing, is essentially incalculable and indeterminable. Certainly if anyone can determine and compute them all, they should become extraordinarily wealthy and powerful as a result, as the market would behave in a wholly deterministic and predictable way to them; their only limitation to doing so would be computational power (and if everyone, including the richest people and nations on earth, falls to that then we haven't really defied "incalculable"). The lack of such people (setting aside the more cynical takes on people such as Jeff Bezos) and governments is essentially proof that nobody really knows exactly how the market works on anything.

As such, the tautological reason that any argument that fails to predict a change in prices, or a lack thereof, had such a failure is because it did not account for every variable and/or their impacts with sufficient precision.

The most obvious factor, which is a fairly large umbrella for many factors, is simply:

Regulation

All illegal trade carries costs from law enforcement which have to be accounted for in how much they charge: distributors locked up, products seized, production supplies confiscated, distribution networks destroyed (destruction of smuggling tunnels, say), etc. Most of that vanishes when the product is made legal and the seller chooses to operate legally. But politics and economics abhors a vacuum, and these costs simply get replaced by other ones. Regulation is the primary one.

To trade legally, you must adhere to standards set by the government. You will likely have to be licensed to produce and sell the product, your product will have to be tested at regular and potentially random intervals to ensure compliance, your bookkeeping must be done accurately and comprehensively and are subject to regular and potentially random inspections, your distributors will need licenses to distribute, you have to pay proper import fees as applicable, you can't just steal water/electricity any more, you have to operate in areas zoned for your commercial/farming activity, get building permits and certifications your building(s) are up to code, pay your workers competitive and minimum wages (none of whom can readily expect to just hide this from the tax authorities, and so rationalize taking a lower cash payment from not needing to pay taxes, or at least deciding not to; in the US the federal government still expects you to pay your taxes on your illicit gains, and if you don't you're now a tax dodger to boot), take out various forms of insurance, pay a whole slew of taxes, comply with IRS requirements on all of these things, etc. etc.

You also have fewer ways to "cheat" customers: you can't cut the drugs with other, cheaper substances because the government will test for that and fine you or worse for violations. The customers now also have avenues to pursue if you screw them over (other than just violence) without exposing themselves to legal danger, as they can now sue you in court for your damaging or negligent actions. And if you sell a crappy product, it's a lot easier for customers to find someone selling it at a higher quality (even if advertising the drug/product is still prohibited, the stigma is likely so heavily reduced, and ease of finding a new seller so elevated, that word of mouth suffices).

Drugs such as marijuana in the US have additional complicating factors in that they are still illegal at the federal level, which means they remain susceptible to being raided and shut down same as they were before (only now they're much more visible). This also aggravates their banking needs, as most banks are subject to federal regulation and so cannot knowingly serve the weed industry without major legal and financial risks. Customers subsequently can't just whip out their Visa to pay for it, either; they need cash. Sellers in the weed market often have to reinvent the wheel or keep large sums of cash just sitting around just to handle what anyone else would use a bank for, which is an additional cost and risk.

In short, the legal costs of operating illegally are exchanged for the legal costs of operating legally. It is entirely possible that the illegal way of doing things is actually cheaper as a result. Indeed, the legalization of the product may have reduced the costs of operating illegally, by reducing the threats of fines and imprisonment.

Answer 2

It is conventional wisdom that the criminalisation of the supply of recreational psychoactive drugs causes an increase in the cost to supply and therefore to the user... However other studies have indicate this is not the case, according to one frequently referenced study from 2016 (though relating to harder drugs)

The Portuguese study from IJDP that you cite isn't about decriminalisation of supply. Quoting from that article:

The recommendations of this panel of experts led to the adoption of the National Strategy for the Fight Against Drugs (NSFAD) in 1999 and encompass a new legal framework with the end of criminal sanctions for drugs users, the enforcement of law to reduce drug production and trafficking, and the expansion of policies and resources for the reintegration of drug users and treatment.

This process culminated with the approval of the law decriminalizing the personal use and possession of illicit drugs ... The new law applies to the use, possession, or acquisition of all drugs, including ‘‘hard’’ drugs, in quantities up to a ten day supply. ... Severe criminal penalties are still applied to drug traffickers.

The "America's Quarterly" article doesn't appear to offer a cite for the "multiple economic studies" that estimate the cost effects of decriminalisation, but I would guess that they're looking at a scenario where growing, supply, and possession are all legal within the USA.

This is quite different to the Portuguese situation where supplying heroin and cocaine remains illegal.

There's also the consideration that Portugal is a small country, and AFAIK not a producer of these drugs. If the wholesale price of heroin in Portugal were to drop, suppliers would take their product elsewhere until the shortage of supply pushed the price back up.

Answer 3

In addition to what has already been stated, in some areas decriminalization has coincided with lower prices and higher quality. For example, I live in Arizona where recreational cannabis was legalized last year at the state level. Medical cannabis had been available for several years.

According to my contacts who have experience with this, 10 years ago illegal marijuana was about $50 (US) for an eighth of an ounce, or 3.5g. Today I can walk into a dispensary and pay about $40 for a better (more potent) 3.5g. The price is even lower before inflation, and the difference is dramatic when considering that a dollar today is worth much less than a 2011 dollar.

Correlation does not imply causation, however, and there are probably other factors involved as already mentioned. However, we can at least determine that it is possible for prices to decrease upon decriminalization. I understand the classical economic argument that making something more available increases its usage. However, marijuana use comes with significant unquantified costs (fatigue, cognitive impairment, etc), that IMHO are more determinant of whether someone will use it than would be the price alone.

Answer 4

The whole story is quite complex, but I can point out a couple of factors. If you read Freakonomics, in chapter 3 it will explain that against usual expectations often drug dealers earn very little from their trade. In an illegal context its easier to exploit people and those in the lower ranks of the distribution chain can earn less than the minimum wage. Their bosses may make huge profits, but their number is small compared to all those who stay on the streets. In a legal context the income may still be skewed, but not so much.

Exploitation also matters when it comes to production. Those in the third world who cultivate drugs sometimes might even earn more cultivating other crops, but they can't say no to criminal gangs.

Last factor I thought about is taxes, but I don't know whether what the big bosses take from the trade might balance the fact that the government takes nothing.

Answer 5

In the case of legal marijuana a big problem is it's illegal for banks to work with you. This was from back when the Bush administration wasn't happy about California legalizing medical weed (in 1996). Pot was still illegal federally, which they used to put the squeeze in the businesses. A few years after Colorado had legal recreational weed (2012) local banks all pulled out (source: a book by a guy who started a legal weed business which I cannot now find). It's tough to run a cash-only business.

The TV series "The Closer" even based an episode on this "High Crimes" (in 2010) where medical weed stores were robbed since they tend to have much more cash on hand (again, source: my faulty memory).

That unknown book mentions another early problem: unclear laws. It wasn't so much regulation as people just weren't sure what you could do. He mentions trading a bale of product with another legal grower, which he thought was allowed, in a Wal-Mart parking lot, and a very confused police officer being called.

But mostly not having a bank. The House passed a bill making it legal just last month, which I assume is waiting on the Senate. But Wikipidia's Cannabis policy of the Donald Trump administration makes it seem unlikely to get any Republican votes.

Answer 6

Decriminalisation does reduce the cost of drugs, if we factor in the substantial added consumer costs of accessing a black market:

• Adulteration. A black market buyer might pay for n units of a substance, but only receive .25n units adulterated with .75n units of filler.

• Contamination. A black market buyer might pay for n units of a substance, but only receive .5n units adulterated with .5n units of hazardous contaminants.

• Health. A buyer who consumes hazardous contaminants might become ill, and while ill lose wages, and have to pay for expensive medical treatment.

• Transaction safety. A black market buyer might pay for n units of a substance, then be robbed of those units soon after, but have no recourse in Law. As such the buyer either must suffer the loss, or perhaps hire someone to guard future transactions, or purchase a bounty against the robbers.

• Legal/punitive costs. A black market buyer might be arrested, and be obliged to pay for expensive legal defense, and suffer various lost opportunity costs -- particularly if the legal defense fails and the buyer is fined or imprisoned.

• Monopolies. Black market drug vendors often enjoy local monopolies, (enforced with violence), which allows them to charge higher prices for substandard products.

Legal market buyers save on these costs, because they and other buyers can sue vendors of adulterated or contaminated products, and in doing so put an end to such vendors, which actions collectively make the market work better for every buyer -- buyers are comparatively less likely to get ripped off, or become sick. Legal buyers enjoy a better quality, safer, product; they get more value for their dollar. Legal buyers enjoy greater transaction safety, and needn't fear arrest or imprisonment.

Answer 7

For decriminalization to take effect on price, it would require decriminalization of the whole supply chain. For example, as long as production of opiates and cocaine is illegal in the countries of origin, or somewhere on the shipment route, it is clear that this will reduce supply, and raise production and shipment costs. Also, any US producer of marijuana will add a risk premium for the possibility of being seized and being put out of business due to US federal law.

Also, there is a big difference between marijuana and opiates/cocaine in that almost everyone can grow a hemp plant at home (at least within the decriminalized legislation) and satisfy his/her own demand, while growing poppies or coca plants is practically not doable in moderate climate areas. It is also very labor and land intensive, so is much more likely to be produced in tropical countries, with different legislation.

It would be interesting (I mean in the scientific sense, not in the societal sense) to know, how synthetic drugs would behave with respect to price under decriminalization. The precursor chemicals are usually readily available (especially under decriminalization, while at the moment, some of them are also regulated), pretty cheap, and a lot of syntheses are an easy excercize for an average organic chemist. These are the best prerequisites for raising supply and lowering prices due to competition. On the other hand, most of them are considered hard drugs (in the sense of being pretty addictive for a lot of people), so they are in this sense comparable to opiates and cocaine.

I remark this, because the supply side is not the only thing that is affected by decriminalization, but also demand. Probably, more people will consider taking drugs when they are legal and also, people who have been consuming them before, will consider taking higher amounts. This is basically the main argument of the prohibitionists, and in my opinion it can hardly be denied, although it is certainly debatable to what extent this phenomenon would occur. But any increase in demand will at least partly counteract an increase in supply, as far as price is concerned. Hence, the quote

"Therefore, drug decriminalization seems to have caused no harm through lower illicit drugs prices, which would lead to higher drug usage and dependence"

is blatantly unscientific, because drug prices may have experienced price stability actually because of higher drug usage.

However, I personally think, the people changing their attitude towards taking drugs would not increase the demand ten-fold (for example, half the people are already taking or have taken marijuana, although it is still illegal in most countries), while it is easily conceivable that complete decriminalization all around the world would increase supply ten-fold. So the effect of decriminalization would be mainly on supply, but the comparatively smaller increase in demand would be primarily a societal issue (your mileage may vary, depending on your value system). Hence, I would expect a price drop for most drugs if decriminalization would be global and unconditional.