As a believer in the free market, I think we have a real life experiment going on right now in Colorado and later this year in Washington, yes I’m going there, the introduction of marijuana for recreational legal sale.
For decades, supporters of marijuana have asked for it to be legalized saying it reduce crime, black marketing, and increase tax revenue. The black market claim may or may not be true. A Black Market exists when the price is too high on legal markets, thus creating a black market for lower, inferior goods of the same product. We see this in Japan and china with counterfeit IPhones. A Black Market can also exist if the government outlaws a particular product or service. Drugs, prostitution are things that generally create a black market.
Colorado is trying to bring a black market into a free market. With this marijuana experiment it will be interesting to see how we react and how the market reacts. The media and the state says they have a created a free market, but they haven’t. There is still heavy market regulation, as can be expected, and the early adopters from a business perspective have a lot of hoops to jump through to be a part of it. While we will probably never see a true free market in this situation it still gives us a good idea of how a free market, even one with high regulation, can operate.
While it is impossible to tell what the actual price of marijuana is on the black market, as it is shadowy for a reason, according to U.S. Border and Customs, the average price for an ounce is $250 in Denver. Remember a black market can exist if something is outlawed or if the price is too high. Because there is a demand beyond what can be seen and a limited supply manufactured by the government and that could be what is happening here. According to the State of Colorado the current price for an ounce is $400 plus a 25% tax rate. Yet they are still flying off the shelves. Why is that?
While the black market may be cheaper and potentially easier to get, now that there is a legal way to obtain it people are actually more afraid of the negative consequences and thus are driving the prices up farther and farther. Eventually the market will come back, but will the experiment work? Should the experiment work?