BC’s Budding Underground Economy

Yesterday, I had the chance to watch Vice Canada’s documentary BC Bud (parts 1, 2 and 3 available here). As my specialization is in food and resource economics, it certainly got me thinking. We often address marijuana from a moral standpoint (be it the evil gateway drug or God/Mommy Nature’s gift to man), from a health standpoint, or from a legal standpoint. But I have seen precious little in the way of a look at the industry through an economist’s lens, which is strange when one remembers that it is estimated to have an output equal to 5% of the province’s GDP.

There are two things which interest me about this industry: first, the diversity that exists in marijuana production across BC (and indeed the rest of Canada), and the ways in which legalization will impact this diversity. Second, the ways in which prohibition has allowed for the centralization of production in some areas by organized crime.

As things stand now, marijuana production both in the lower mainland, the interior, and the north is varied. Small growers coexist with large operations. In the small town of Grand Forks, BC, it is estimated that 300 of the less than 4000 souls who call it home grow marijuana. Much of what is produced finds its way into the USA. It is this decentralized system which has created what can legitimately called one of the few truly free markets in Canada, in the sense that it is made up of so many buyers and suppliers that no one entity can control the prices. And the fact that it is illegal means that few if any regulations by way of quality or price controls exist. Economists have an interesting opportunity to look at how this markets works, given its unique extralegal parameters.

Moreover, it is necessary to differentiate between different kinds of legalization, a fact pointed out by activist David Malmo-Levine in his interview with Vice:

 The coffee bean model is based on what we do with coffee beans right now, anyone can sell them, anyone can grow them, and anyone can use them. The wine model is for adults, and Prop 19 is more exclusive in that not any adult can grow and not any adult can deal, you have to be rich and well connected…

In the case of Prop 19 or the current “legal” structure in Washington state with I-502 being passed, you have a situation where in I-502 people aren’t allowed to grow at all at home and it’s basically a monopoly for the retail outlets. In Prop-19, you were allowed to grow one big plant if you had your landlord’s permission or if you owned your own home. And that was one big plant per household. So that also guarantees the retailers that a lot of people would have to go to them. Any legalization model that does not include a liberal allowance for home-grow operations is a monopoly of sorts; it will force people to have to buy from retailers…It’ll create a few very, very rich growers and a few very, very rich retailers and everyone else is out of work.

It is clear that certain trends in legalization do not bring the entire market into the legal sphere. A key question for economists, especially those concerned with the ability to participate in markets and in local economies, is what the impact of Prop-19 style legalization will be. Because of the ease of access for seeds and equipment, it seems unlikely that demand for cheaper, stronger marijuana will cease. And where demand exists, business goes, legal or not. Clearly, not all legalization is created equal. For pro-legalization activists, perhaps the question may be rephrased as “what is the best way to bring the existing markets into the legal sphere?”

The centralization of production leads inevitably to the question of organized crime. The ability to use marijuana profits to then buy harder drugs like cocaine has been an important motivating factor for gangs to enter the business. To their credit, many officers are doing what they can do break up these operations, which out of the many producing entities cause by far the most social harm. However, it is also the case that, as was the case with alcohol prohibition, it is the extralegal nature of the market that allows them to thrive in the first place. This is the second question economists may find interesting: to what extent would the different forms of legalization destroy the opportunities for organized crime to operate? How would the effect on prices and availability change how gangs work within the marijuana and wider drug markets?

These are just a couple of the questions that came up in my economist’s mind as I watched the documentaries linked above. Perhaps someone knows of work being done in this field, and if so I’d be glad to hear about it. The implications for the industry, for activists, for politics, and for the future of the law may be interesting indeed.