Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

Sunday, August 26, 2018

"Price Elasticity of Illegal vs Legal Cannabis: A Behavioral Economic Substitutability Analysis"

I just came across this recent research available on-line in "preprint" with the same title as this post and authored by a collection of researchers.  Here is its abstract with its significant conclusion highlighted:

Background and Aims:

The evolving legal status of cannabis in the United States and other countries necessitates the development of evidence-based regulatory policies to minimize risks associated with cannabis misuse.  A prominent public health concern is whether legalization will lead to an expansion of the illegal cannabis market, with illegal cannabis acting as an economic substitute.  Empirical data on this data on this issue is virtually nonexistent.  This study used a behavioral economic approach to investigate substitutability of legal and illegal cannabis in legalized catchment areas in the U.S.

Methods:

Adult cannabis users (N=740; Mean age = 33.8; 52% female; 73% Caucasian) were recruited using an online crowdsourcing platform from U.S. states with legalized recreational cannabis.  A modified substitution-based marijuana purchase task assessed cannabis consumption from concurrently available legal (e.g., a dispensary) and illegal (e.g., a dealer) sources. Participants indicated the amount of cannabis they would consume from each source while prices of the two options were either held constant ($10/gram) or escalated ($0-$60/gram).  Consumption values were used in demand curve modeling to generate quantitative indices of price sensitivity and elasticity.

Results:

Both legal and illegal fixed-price cannabis options had significant positive cross-price elasticities (ps < .001).  However, the legal alternative had a substantially greater effect on consumption and elasticity of illegal cannabis (∆elasticity = 0.0018; F(1,37) = 148, p<.0001) than the opposite scenario (∆elasticity = 0.0002; F(1,37) = 47, p<.0001), indicating asymmetric substitution.  Demand for legal cannabis was significantly greater than illegal cannabis (p< .0001).

Conclusions:

Cannabis users treat legal cannabis as a superior commodity compared to illegal cannabis and exhibit asymmetric substitutability.  Cannabis price policies that include higher consumer costs for legal cannabis relative to contraband would not be expected to incentivize and expand the illegal cannabis market.

https://lawprofessors.typepad.com/marijuana_law/2018/08/price-elasticity-of-illegal-vs-legal-cannabis-a-behavioral-economic-substitutability-analysis.html

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