Tuesday, August 11, 2009

legalizing marijuana II: the Price of Drugs

Legalizing Marijuana II:
The Price of Drugs

If marijuana were legalized, what would happen to its price? Although many assume the price would go down, very few attempts to quantify that decrease have been made. At least four approaches are possible, even given the almost total lack of solid price or market data. Given the state of the data, these approaches give only rough approximations, but the similarities of their results suggest that they are reasonably reliable.
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Marijuana can be treated as a commodity. In an efficient market, the price of a commodity approaches the marginal cost of production as a limit. The price of marijuana should be close to other commodities produced by similar methods. Coffee, tea, and tobacco are similar products that have slightly more expensive methods of production. Coffee, roasted and ground, retails for between $0.35 and $0.40 per ounce. Tea leaves, plucked, dried, shredded, and packed in tea bags is about $1.00 an ounce. A pack of cigarettes, about one ounce of tobacco leaves, hand-picked, cured, blended, and rolled into cigarettes, can be bought for $5.00, including over $2.00 in taxes. Hothouse tomatoes have been advertised for $0.79 per pound ($0.05 per ounce). Broccoli, probably the most directly comparable product is available for less than $2.00 per pound ($0.33 per ounce).
Based on these comparisons, a reasonable price for run-of-the-mill marijuana should be about $1.00 an ounce. A recent quotation of $0.85 per ounce for legal marijuana in Czechoslovakia confirms this estimate. This price is at least two orders of magnitude less than the $200.00 to $400.00 per ounce commonly cited for today’s marijuana.
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Heroin and aspirin were both invented by the Bayer company in the 1890s and introduced on the market at the same time. During the forty years that heroin was widely sold in a legal market, Bayer sold the two products, manufactured by similar processes, at the same price.
Today, generic aspirin can be purchased for $1.00 for a bottle of one hundred 300 mg tablets, or about $35.00 per kilogram. Illegal heroin wholesales for almost $100,000 per kilogram, a difference of more than three orders of magnitude. Even allowing an economy of scale decreasing the cost of aspirin by a factor of two or three would not appreciably change this ratio.
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Amphetamines (including Benzedrine, Dexedrine, and methamphetamine) were among the most widely used medical drugs in the 1960s. Any of them could be produced for less than one dollar for a thousand tablets. Since an typical dose is 5 mg, that cost equates to less than $1.00 for 5,000 mg (5 grams), or $200.00 a kilogram, or under $6.00 an ounce. This cost would be between two and three orders of magnitude under current street prices for illegal methamphetamine, which the government estimates to be above $14,000.00 per kilogram
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Costs for legal cocaine are harder to calculate because it has had no significant legal market in the United States since 1900 nor little world-wide since 1946. (Cocaine, while a legal Schedule II drug, has been largely replaced medically by synthetics like Novocain and procaine.)
A rough estimate can be based on the current price of unprocessed coca leaves in the Andean countries, which includes those produced for legal use by the native inhabitants. Coca can be bought for around $2.00 per kilogram. Since coca leaves contain one or two per cent cocaine by weight, this price amounts to about $200.00 for raw, unprocessed cocaine.
The chemistry for producing cocaine is relatively simple, the main process being over one hundred years old, and can be performed by semi-skilled labor. A mark-up of 100% to pay for refining, shipment to South American ports, and profits for the producer would place a kilogram of pure cocaine on Colombian docks for $400.00. Doubling once again would move the cocaine to an American distributor for $800 a kilogram. A retailer could, then, show a reasonable profit retailing it for $1,600.00 per kilogram, or about $45.00 per ounce.
Street prices for illegal cocaine range upward from $100.00 per gram, or $100,000.00 per kilogram retail. This price is slightly less than two orders of magnitude greater than the estimated, but very generous, legal price.
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None of these estimates can make any claim of exactness. The marijuana estimate, based on several comparable products, is probably close to reality; but the others are no better than my starting data.
The significance in these estimates is that, as rough as they are, they all converge approximately on the same range of values: that illegal prices are in the neighborhood of 100 times as high as the equivalent legal prices would be. The power of these estimates is in that convergence.
My hope is that this convergence will convince others with more skills than I in quantitative analysis to look at this issue, using much more of the available data. I look forward to seeing their results.

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