Marijuana, Market Forces and Why Colorado’s New Pot Law Could Actually Be a Black-Market Boon

“What’s the price of an ounce of marijuana in Colorado these days?” I e-mailed a friend who I thought might know. The reply: for the top quality stuff, about as much as a share of Apple stock. Apple shares were going for $528 recently, which raises an interesting arbitrage possibility: What’s your guess about the price of Apple and pot a year from now, when Colorado’s legalization of personal pot possession establishes a legitimate commercial market for weed?

My play would be to go long on Apple and short hemp.
Colorado has made the possession of marijuana legal but hasn’t figured out much else. Looking at it from a classical economics perspective, the legitimization of marijuana raises the issue of what happens to the demand, quality, supply and price of a product that has now become legal after decades underground.

Logic tells you that if the state legalizes what was once contraband, demand should increase. But with demand set to rise, where will the supply come from? If only Colorado-grown marijuana is legal, and the new statute limits residents to six plants for personal use, could there be a critical gap in the supply chain? “If it’s as popular as all the proponents suggest, we won’t have enough local growers to meet demand once it becomes legal,” says Mac Clouse, finance professor at the University of Denver’s Daniels College of Business.
Colorado’s law enforcers will have to make some choices: Do they try to interdict supplies from beyond Colorado even though its citizens are essentially requesting it? Or does Colorado allow farmers to grow it in the state — a cash crop if ever there was one. It would seem stupid for the state to sanction possession but not supply, since drug runners from Northern California to Mexico will be lining up to supply the Colorado market.
That’s one reason the price of marijuana is likely to go down. Another is that as new retail entrants fight for market share, they will do so using price as a tool — unless the state sets and fixes the price, or arbitrarily limits the number of distributors, just as it does with, say, liquor stores. But Colorado allows beer sales in lots of places too. “Is it really like alcohol? In this state we have private liquor stores and beer in grocery stores,” says Clouse. “Does that mean you sell [marijuana] in grocery stores?” Hmm, the produce aisle? Next to the rosemary and basil? Again, if the number of authorized outlets isn’t sufficient for the market, the underground distribution network will expand to fill that demand.