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Surplus of Legal Marijuana in California Sends Prices Crashing

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One of the objections to making medical marijuana legal was that weed grown for the legal market would increase supply for the illegal market. It looks like this may be happening in California.

An news article out of Arcada, California describes a sudden drop in marijuana prices on the illegal market due to an overproduction by legal growers.

This area is part of the “Emerald Triangle” – an area of California where many private citizens turned to pot growing for additional income and where growing conditions are ideal. The crash in prices comes after a federal crackdown on dispensaries left cultivators with a surplus, at least some of which they can’t sell at any price.

Adam Smith's Invisible Hand

The economic realities of supply and demand have dropped the prices from a high of $5,000 a pound down to $800 or less.

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And this furthers the pressure to smuggle the “primo bud” to other states where prices are higher. And although closing dispensaries are thought to have started the fall in prices, it seems that with the cheap, illegal weed around, many patients are forgoing the legal version – reports are that dispensary sales are down 75 percent. It appears that even those with a prescription are tempted to buy their marijuana on the illegal market, just because of the lower costs.

Another economic side effect is that workers, once highly paid to raise the crops are either out of a job or forced to take a dramatic cut in wages. Some were being paid in marijuana, but with the free-fall prices, this is no longer viable.

How bad is it? According to the article, “The marijuana meltdown could have major regional effects. In Humboldt County, a recent study by a local banker estimated marijuana accounts for more than one-fourth of the county's $1.6 billion economy.”

It turns out that building an economy on a single product makes swings in supply and demand a huge concern. Ordinarily, export would even out these effects, as California produces a very high quality product. But the demand in other states cannot be met, even in the medical marijuana market – shipping and sales between states is still illegal, as the federal government regulates interstate commerce and marijuana is illegal federally.

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