One of the most common arguments in favor of legalizing cannabis is that it takes the industry out of the hands of the black market.
Since this (generally) means safer products, tax revenue and less youth access, cannabis advocates often put this forwards as one of the key cornerstones of their position. But since about half of the country has already legalized cannabis, we should ask: is this really true?
Continuing our series of the Best Arguments for and Against Cannabis, we’re looking in depth at black markets and the legality of cannabis.
Summary: Is it Worth Legalizing Cannabis if the Black Market Will Still Exist?
No…
- Black markets always accompany legal markets for cannabis. New York and California are two of the most prominent examples.
- Black market sellers don’t have to ensure products are safe, don’t pay taxes and are not concerned about youth access to cannabis.
- If black markets continue to exist, legalization doesn’t solve all of the problems it claims to – illegal sellers undermine everything.
Yes…
- Problems with the legal market are the main driver behind black markets. This could be expensive prices or too few dispensaries in a state.
- Even if you can’t entirely remove black markets, good policies which give consumers a better experience will reduce them to nearly nothing, as in Colorado.
- As with alcohol, there will always be “moonshiners.” But that doesn’t mean that we should make illegally sold weed the only type available.
An Uncomfortable Truth: Black Markets Still Exist in Legal Cannabis States
It is an undeniable fact that black markets still exist in states with legal cannabis. In fact, legalizing cannabis may even strengthen the black market in several ways, depending on how governments handle legalization.
New York is one of the most obvious examples of this problem. The state legalized cannabis in 2021, but the first legal dispensary didn’t open until the end of 2022. This resulted in a thriving “gray market.” Sellers attempted to stay on the right side of the law by offering cannabis in exchange for “donations.” They thought this would technically render their sales legal “gifting” of cannabis.
However, and quite obviously, this was not really what politicians intended by allowing the gifting of cannabis. Lawmakers quickly clarified that this still counts as an illegal sale. This didn’t stop the illegal sales, though.
This isn’t the only reason a legalized system can have problems with black markets. Leafly’s Opt Out Report from 2022 laid out a very clear argument – with supporting evidence – that states with fewer dispensaries per capita generally capture less of the market with legal sales. The most extreme example in the report was New Jersey. They had only 0.3 dispensaries per 100k residents, and consequently 80% of sales were on the black market.
California is a more informative case, though. Despite having legalized in 2016, six years before Leafly’s report, the state only had 3 stores per 100k residents at the time of the report. 55% of sales were still taking place through the black market. This was driven by the ability of local areas to “opt out” of legal cannabis sales in their community. This left large parts of the state with no legal cannabis dispensaries.
Leafly estimates that people are willing to travel just under 15 minutes to buy cannabis. If the nearest dispensary is farther away than that, then the black market immediately gets a potential customer.
Before we go further into the reasons, it’s important to note that it is unambiguously true that black markets still exist in legal states – even those with great dispensary coverage.
Why Legalization Might Actually Help Black Markets
Legalization also sets up a situation that is beneficial to the black market in some ways. Firstly, the fact possession of cannabis is legal means that there is less risk for the sellers and basically no risk to the buyers. Once you have the weed, there’s no risk as a buyer. If you’re dealing, all you have to do is make sure you only hold up to the allowance at any one time – even if you have more at home.
Secondly, as it’s generally legal to grow at least a little, there are many problems with illegal crops hidden amongst legal ones or just straight out illegal growing operations. This plus occasional oversupply issues in the legal market (and easy diversion across state lines) makes it easier for the cannabis to get into the hands of illegal sellers and plays into the next issue: prices.
Since the legal cannabis industry comes with fees, taxes, property costs and more, the cost tends to be a little higher, especially early on. This gives the black market a distinct advantage right out of the gate. They have customers already – since weed was illegal before it was legal. Moreover, they can keep costs down thanks to a ready supply of cannabis and very few overheads.
And finally, as discussed above, your local dealer is local, but your closest dispensary might not be.
Overall, there are many factors that give black markets an extra boost when a state legalizes cannabis.
Counterpoint: Legalization Needs to Be Well Managed
While it’s true that all legal states have some black market sellers, it can be effectively minimized with good management. In Colorado, for example, based on Leafly’s 2022 report, the illicit market only accounts for 1% of total sales, meaning the legal market controls basically everything.
The simplest reason for this is the double-digit number of stores per 100k residents (18, for Colorado) and generally good prices, with a 15% tax in most cases.
While the quote is from a different industry, Gabe Newell, CEO of Valve (who run Steam), pointed out with regards to media piracy “The easiest way to stop piracy is not by putting antipiracy technology to work. It’s by giving those people a service that’s better than what they’re receiving from the pirates.”
And this is an equally valid point here: you stop black markets by giving a better service than the black market dealers. In Colorado, you’ll probably have a dispensary reasonably close to your home and the price is not going to much higher than it would be on the black market. Generally, if you give people the service they want, they will not be interested in going to an illegal seller. Who would buy untested weed for the same price as carefully-grown, fully-tested and reliable cannabis?
In other cases, the problems are so obvious it is almost not worth mentioning. If you do something like New York – legalize possession over a year before you allow people to buy it legally – you don’t have to be an economist or psychologist to work out the consequences. This is just a terrible idea, and blaming cannabis legalization for the consequences rather than awful planning is simply not an honest assessment.
The Consequences of a Thriving Black Market
With black markets being the “standard” way to buy cannabis for many, many years, it’s easy to forget or brush over the consequences. So let’s lay them out clearly:
- States lose tax revenue: The tax revenue from legalization is usually earmarked for law enforcement, social programs and/or communities affected by the war on drugs. Black market sales take this money away from the people it can help.
- There is no age limit in a black market: The street corner dealer doesn’t have to care if you’re 21. If you want cannabis out of the hands of youth, quashing the black market is absolutely necessary.
- Consumers suffer: Black market cannabis doesn’t need to be lab tested or meet any of the important standards established by regulated markets. In the end, consumers have less assurance of quality.
- Black markets can support crime: While your dealer might just be independent and wanting to live the good life, you could also unwittingly be funding gangs or other criminal activity. Even if weed itself doesn’t harm the community, the people selling it might.
Our Take: Black Markets Are a Problem, But Can They Ever Be Stopped?
It’s hard to argue with the overall point that legalization doesn’t entirely stop black markets. In some cases, the consequences of this could be serious. However, this doesn’t rise to the level of a reason not to legalize. It’s more of a reason to handle legalization sensibly and to guard against unintended consequences.
Allowing localities to “opt out” of cannabis businesses might seem like a good idea, but the reality is that it actually means opting out of legal businesses, not cannabis trade altogether. This should be clearly conveyed, and the ability to opt out should be limited, so consumers all across the state have a convenient location to make purchases from. Similarly, taxes should be imposed but lawmakers should be mindful of the end-price for the consumer, so it doesn’t end up much more expensive than black market sellers.
Unfortunately, even taking all of these steps probably won’t completely kill the black market. With cannabis being easy to grow and there always being some potential for profit, it’s likely that there will always be some small black market. It’s akin to how even though the US has strong control over the alcohol market, there is still some “fake alcohol” sold on the black market. No matter what you do, there will always be some moonshiners.
References
Barcott, B., & Whitney, B. (2022). ‘Opt-out’ towns are encouraging illegal marijuana sales. Leafly. https://leafly-cms-production.imgix.net/wp-content/uploads/2022/09/21143531/OptOutReport2022.pdf
About the source:
- Peer reviewed? No, a report from Leafly.
- Methodology: Used a mixture of public and private data to determine what percentage of sales in each legal cannabis state took place in the black market vs. the legal market.
- Main results: States with more legal stores per capita tended to have fewer illegal sales. Colorado has the lowest percentage of illegal sales and 18 stores per 100k residents, while New Jersey has the highest percentage and 0.3 stores per 100k residents.
- Other notes: The report assumes that 1/3 of adults use cannabis in the year in all states. This is unlikely to be accurate in all cases and likely leads to some bias in the results.
Herrington, A. J. (2022, July 11). New York cracking down on unlicensed weed dealers. High Times. https://hightimes.com/news/new-york-cracking-down-on-unlicensed-weed-dealers/
About the source:
- Peer reviewed? No, published in High Times.
- Main points: 52 unlicensed New York weed stores were sent cease-and-desist letters by New York’s Office of Cannabis Management. They clarified that “gifting” systems still count as sales.
- Other notes: It’s worth noting that there were many, many more illicit stores than this, so this action barely scratched the surface.
Kaste, M. (2018, May 16). Despite legalization, marijuana black market hides in plain sight. NPR. https://www.npr.org/2018/05/16/610579599/despite-legalization-marijuana-black-market-hides-in-plain-sight
About the source:
- Peer reviewed? No, published in NPR.
- Main points: The author describes how illegal grows are often hiding in plain sight in states such as California. It goes into how cannabis is diverted from the legal market to the black market.
- Other notes: The article points out that since the yield from plants is not consistent, legal producers can easily say they got less than they did and divert the rest to the black market.
Kuznia, R., Glover, S., Abou-Ghazala, Y., Lah, K., & Xiong, Y. (2024, August 31). The pot farm next door: Black market weed operations inundate California suburb, cops say. CNN. https://edition.cnn.com/2024/08/31/us/california-black-market-marijuana-grow-houses-invs/index.html
About the source:
- Peer reviewed? No, a report from CNN.
- Main points: Details the widespread practice of using “grow houses” for black market cannabis in California.
- Other notes: Part of the issue identified in the article is the fact that most cannabis offenses in the state are misdemeanors, even large grows.
Ramanathan, L. (2024, November 4). How marijuana legalization played itself. Vox. https://www.vox.com/the-highlight/379796/marijuana-legalization-black-market-drug-war-raids
About the source:
- Peer reviewed? No, published in Vox.
- Main points: Details the black markets which persist in states with legal cannabis, spurred on by high taxes on legal sales and stringent regulations.
- Other notes: The article discusses factors that lead to black markets but doesn’t discuss states like Colorado, which have successfully quashed black market sales, or how they did it.
Tobiassen, R. (2014). The “fake alcohol” situation in the United States: The impact of culture, economics and the current regulatory system. Center for Alcohol Policy. https://www.centerforalcoholpolicy.org/wp-content/uploads/2015/04/The_Fake_Alcohol_Situation_in_the_United-States_compressed.pdf
About the source:
- Peer reviewed? No, a report from the Center for Alcohol Policy.
- Methodology: Uses data from the World Health Organization, the American Association of Poison Control Centers, news articles and social media posts to investigate the extent of issues with “fake alcohol” in the US.
- Main results: “Fake alcohol” is less common in the US than in other countries. It is more likely to involve bottles being refilled with either unknown alcohol or moonshine.
- Other notes: The report points out that the mature alcohol industry in the US undermines the demand for “fake alcohol.”