Why Do People Continue to Buy Grass from Dealers in Colorado?

Demand > Supply = high Prices = black market with low prices

Colorado's Department of Public Revenue recently published an interesting study on trends in the marijuana market. According to its data, of the state's 5.36 million inhabitants 9%, or 485,000 people, are registered consumers. According to the study the 2014 marijuana consumption forecasts are for 130 metric tons, 31% more than the same body's previous forecasts, and 89% greater than the forecasts of the Colorado Futures Center.

Tourists are largely responsible, as in the metropolitan regions of Denver they account for up to 44% of consumption, while in other regions, such as mountain towns, they are responsible for 90% of grass consumed. If the demand for marijuana is so much greater than the supply, it is only logical for prices to be very high. Who, then, buys legal cannabis when the black market is available?

An ounce is 28 grams, and an eighth is 3.5 grams. These rates correspond to an eighth of an ounce. Image from Ibtimes.

"I don't know who is buying recreational marijuana at dispensaries, with the exception of middle class whites and tourists," explains activist and mediator Rudy Reddog Balles in a Washington Post report. "Everyone I know still calls his dealer to buy on the street corner."

In Colorado the price on the street for a gram of grass is around 8.5 dollars, medicinal marijuana costs 10, and recreational weed costs 20 - 25 dollars per gram. The difference is primarily due to taxes. The tax on the sale of medicinal cannabis is 7.72%, while recreational marijuana is subject to the same tax, plus another 10% for the state, 3.5% for the city and county, and often another 15% on the transaction between the distributor and seller if it's wholesale.

In this way recreational marijuana is saddled with a price increase of 30%, 50% or even 100% relative to medicinal marijuana, due to taxes, and also because dispensaries sell at high prices as a result of the great demand. The difference compared to the street is even greater, which allows dealers to have a field day, with every alternative available to them: they can grow and sell illegally, enjoying the greatest possible margin; buy medical marijuana legally and sell it illegally as recreational in Colorado or other states; or they can even grow medical marijuana legally and resell it.

The parallel market is no longer black, but grey

Such is the case of "Junior," a middle-aged Latino resident of Denver with diabetes and heart problems who holds a license to grow 16 marijuana plants a year for medicinal purposes. Of course, most of what he produces, he resells on the black market. He was cultivating another 55 plants along with another registered medical user until the landlord began to suspect something. And this is what many people have been doing since medical marijuana was legalized in Colorado in 2000.

The price difference between recreational and medicinal marijuana at dispensaries. Graphic from FiveThirtyEight.

According to the State of Colorado the black market boom is a temporary situation. As more dispensaries are opened and the supply of recreational marijuana rises, the market will be more competitive and prices will adjust sharply. With those taxes, however, it seems it will be difficult for them to compete with a black market that turns grey when the cultivation of medical marijuana is legal. It is true that medical marijuana contains much lower percentages of THC than recreational, but who goes house to house checking up on the varieties users are planting?

It is very easy to acquire a medical marijuana license in Colorado - and in many others. In Colorado, in particular, this is reflected very well in the aforementioned taxation figures. Of those 17 million dollars brought in over the first five months 6,5 million corresponded to medical marijuana, which is subject to lighter taxes - at times three times lighter (10,9 million to recreational). Thus, much more medicinal marijuana is being consumed than recreational, and the price is responsible. Much of this marijuana is then resold.

Colorado is the new Mexico

Part of "Junior's" stash. Photo by Gabe Silverman/The Washington Post.

Colorado shares borders with Utah, Wyoming, Nebraska, Kansas, Oklahoma, New Mexico and Arizona. The latter two do not concern us because marijuana enters through Mexico, and its medicinal use has been legalized. Among the others, however, not one has legalized it for this purpose. In fact, in all these states - except in Nebraska, where possession is decriminalized - there is a total ban on marijuana, and with very severe sentences.

This means that, according to the marijuana price crowdsourcer priceofweed the cost of an ounce of quality marijuana in these restrictive states ranges from 340 to 360 dollars, while on the black market in Colorado it stands around 240. Again, a big margin. It seems logical that the destination of most of the weed smuggled out of Colorado is Nebraska, because it has a margin similar to its neighbour, and sanctions are only administrative.

"They say that money doesn't grow on trees," says Junior in the report, as he laughs. "Well, they're wrong. When they come in they ask: 'what is that smell?' That's the smell of money, I tell them."