Can Legal Cannabis Succeed in the U.S.?

Can the U.S. Embrace Legal Cannabis Successfully?

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Summary

• The popularity of legal recreational cannabis in the U.S. is growing, with 88% of Americans supporting its legalization, according to the Pew Research Center.
• However, the economic success of the legal cannabis market has not been guaranteed.

As legal recreational cannabis use becomes more commonplace in the U.S.—24 states currently allow it—public opinion has shifted significantly in its favor. According to the Pew Research Center, 88% of Americans believe cannabis should be legal for recreational or medical use, and about half think legalizing recreational cannabis benefits local economies.

However, the path to legal cannabis has been far from smooth. Distinguished Professor Daniel Sumner and research faculty member Robin Goldstein, both from the Department of Agricultural and Resource Economics at UC Davis, have studied the market extensively. In their book Can Legal Weed Win? The Blunt Realities of Cannabis Economics (University of California Press, 2022), they highlight that the economic outcomes of legal cannabis sales and usage haven’t been the guaranteed success some anticipated.

“When people first entered this industry, there was limited past data, leading to wild assumptions about market size,” Goldstein explained. “Many predicted that cannabis would continue to sell for $1,000 or $2,000 a pound wholesale ten years after recreational legalization. Yet, competitive markets and technological advancements have caused prices to drop rapidly, and this trend will likely continue in every state.”

Both economists acknowledge that legalization has encountered numerous issues, further complicated by heavy regulations and taxes, which drive up consumer prices and maintain competition with the illegal market.

Regulation-Heavy Industry

With cannabis legalization, each governing entity established extensive rules, regulations, taxes, and fees for businesses involved in growing, processing, wholesaling, or retailing cannabis. These hurdles create high barriers to entry and operational costs, making it difficult for legal businesses to compete with illegal counterparts.

“Step one for entering the cannabis business is hiring a lawyer to navigate 2,000 pages of regulations,” Sumner noted, highlighting the multiple agencies involved.

Unlike other industries, cannabis businesses face more stringent regulations. Sumner said, “We used to say, ‘Let cannabis be kale,’ implying it should follow similar rules. But legal cannabis regulations are much more extensive.”

Consequently, the cost of legal cannabis has soared for consumers. “Everyone gets their piece and wish list of regulations, resulting in a product twice as expensive as the unlicensed market,” Goldstein said.

Persistent Illegal Market Competition

Lower prices are a significant reason for the ongoing competition from the unlicensed cannabis market. Given the challenges new legal businesses face, the underground market retains an edge.

Legal cannabis hasn’t dominated the market as some predicted. “Most counties in California haven’t allowed it,” Sumner said. “Local control was a principle in California. But these counties end up with illegal weed instead of legal weed, as it’s not like cannabis disappears.”

Goldstein added, “People will consume similar amounts whether it’s legal or illegal, shifting their spending based on which market is more appealing.”

Could Federal Legalization Help?

Recently, the federal government indicated it might reclassify cannabis from a Schedule I to a Schedule III drug, recognizing its lower abuse potential compared to substances like heroin. This change could offer tax benefits for businesses and possibly reduce federal marijuana-related arrests, though these have already declined. It might also lead to increased cannabis research funding. However, cannabis would still be considered illegal.

Goldstein suggested that full descheduling or decriminalization would have more significant implications for the industry. “With descheduling, cannabis could likely be sold in various stores, significantly altering the market landscape,” he said.

In conclusion, while legal cannabis in the U.S. has made substantial progress, it continues to face significant challenges. Navigating these complexities requires understanding the market dynamics, regulatory environment, and ongoing competition with the illegal market.