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What's the right price for legal pot?

Medical-marijuana dispensaries in Washington State can grow their own product, as this dispensary in Seattle does. A state licensing system -- mandated by a voter initiative to legalize recreational marijuana starting in 2014 -- will permit growing, processing and sale to all adults in the state.

Serious Medicine is a medical-marijuana dispensary in Olympia, Washington, with more than fifty varieties of cannabis, plus infusions, concentrates, and edibles. Director Forrest Escobedo is hesitant about applying for a license to sell recreational marijuana commercially from the storefront, as he would likely have to raise his prices to account for a 40-percent tax markup from the state.

Washington State is embarking on a novel experiment to license the legal production, processing, and sale of recreational marijuana (even though it is still illegal under federal law). Colorado is doing the same--both at the behest of voter initiatives. Regulations to launch the market at the beginning of 2013 are being drafted now. 

High-quality marijuana buds sit in mason jars behind the counter at a nonprofit medical-cannabis dispensary in Seattle, Washington. The state is moving toward licensing stores to sell recreational marijuana to all adults, without a prescription.

The states of Colorado and Washington are boldly going where no government has gone before. By voter initiative (Amendment 64, and Initiative 502, respectively), both states are making recreational marijuana fully legal, starting in 2014. It’s been illegal up to now to grow, distribute, and smoke it. In recent years, eighteen states and the District of Columbia have carved out a grey area of quasi-legal or decriminalized growing, sale, and use -- for those with a medical-marijuana prescription.

In fact, marijuana is still criminalized under federal law, and those in the illegal trade face steep penalties as potential felons. There’s no word yet from the Justice Department if it will permit these state experiments in hallucinogenic-federalism to go forward. (Today, the United States Conference of Mayors called on the federal government to refrain from intervening.) But for now, each state is putting out regulations to set up the first-ever legal commercial cannabis markets in the world (Colorado passed its enabling legislation in May; Washington is issuing revised draft regulations on July 3). And officials in both states are hoping they will get clear guidance from the Justice Department before they begin issuing licenses to producers, processors and retailers this fall, in anticipation of a market-launch in early 2014.

This reporter traveled over the border from his bureau in Portland, Ore., to Washington’s capital, Olympia, to see how the state is attempting to manage this experiment.

The Washington State Liquor Control Board now plans to license the production, processing and sale of recreational marijuana. And it plans to tax it heavily, through license fees and excise taxes, which could bring the state several hundred million dollars per year (a state revenue estimate pegs potential revenue at more than $450 million per year by fiscal-year 2017).

That means the state will certify and require labeling of locally-grown pot (no cannabis imported from out-of-state will be allowed) for its potency, and for being free of pesticides, mold, or other contaiminents -- just like kale at the local grocery store. The state will decide how many producers and processors to permit, and whether there can be pot retailers all over the place, or if the number should be limited (store location will be restricted to discourage access by minors). The state will conduct criminal background checks on anyone who wants to get into the business, and it’ll monitor greenhouses and (if they are permitted) outdoor grows, to make sure marijuana intended for state-approved stores doesn’t get diverted to the black market.

And crucially, the state will try to establish a proper price for pot down at the corner store.

“I’m weighing out four grams of this Alien Chemdog for this gentleman here, he’s one of our regulars,” says Forrest Escobedo as he serves a client at the medical-marijuana dispensary he manages. Serious Medicine is an unassuming storefront on a busy commercial strip in downtown Olympia. Tattoo parlors, bars, vintage clothing and record stores, and ‘glass shops’ (that’s code for marijuana pipes and other paraphernalia) abound here. Inside, the dispensary has couches, a mural, and a fog of pot-smoke to wade through as one strolls to the counter, where marijuana is on display in quart mason-jars. There’s a small growing operation with plant-lights in the back.

Escobedo says Serious Medicine has at least fifty varieties on hand -- ones named Hawaiian and Couchlock are particularly popular right now -- as well as infusions, concentrates, and edibles.

“We have more of a connoisseur kind of place, high quality for a really affordable price,” he says. The potent stuff he provides to medical customers costs (it's called a "donation") around $10 per gram (or $280 per ounce). One gram is roughly two joints worth, enough to get high twice.

Escobedo is considering applying for one of the new licenses to sell recreational cannabis to any adult, without a prescription. He would not have any problem passing the criminal background check, he says.

But going commercial would almost certainly mean raising his prices. The state will tack on about forty percent in taxes by the time the product reaches the retail consumer. Escobedo says that might mean a lot of people coming in who just want “really cheap, not-very-good pot.” And he says that’s not the kind of business he wants to be in.

But the thing is, the state actually wants to try to push pot prices a little higher, says Mark Kleiman. He’s a drug-policy expert at UCLA and co-author of the book "Marijuana Legalization: What Everyone Needs to Know." The state of Washington has hired Kleiman’s firm, Botec Analyses Corporation, as its principal consultant on legalization policy.

“A low price encourages heavy use,” Kleiman explains. Even though the state is setting up a whole new system to grow and sell pot, it doesn’t want to encourage tens of thousands of new pot-smokers -- people smoking away their paychecks.

“Sixty percent of the days of cannabis use in this country, the person using the drug has a high-school diploma or less," Kleiman says. "So we have what Jonathan Caulkins has called this Whole Foods debate about a Walmart drug. I’m terrified about appealing to kids, appealing to not-very-sophisticated consumers.

“Price matters more to heavy users than to light users,” Kleiman continues. “It matters more to poor people than to rich people. Most teenagers don’t have very much disposable income, so low price is a particular risk in terms of underage use. And if the price is low enough in Washington, then somebody might want to buy it in Washington and ship it out of state.”

But the state doesn’t want the price in its licensed stores to be too high, either. Because if the price inside the store is way higher than the price out on the street, the illegal black-market will keep thriving. Randy Simmons is director of administrative services at the Washington Liquor Control Board, and he’s managing the roll-out of the state’s legal marijuana market.

“You don’t want to tax it to the point where you’re pricing yourself out of the marketplace,” Simmons says. “Right now, we’re having to compete with somebody else who’s growing. You’re taking a group of people that -- some for as long as 40 years -- have been growing this product [illegally]. There’s an established marketplace out there. And now we’re going to start regulating people that have never been regulated. If you bring them in from the black market to the regulated market, they’re no longer competing -- so you’ve eliminated some of that competition where people would go to get product besides to the stores.”

Those black-market growers are already flooding the West Coast with relatively cheap, high-quality marijuana. The danger is, they’ll just keep producing and selling -- avoiding the state’s 40-percent tax markup, undercutting the state’s stores. Think moonshiners versus revenue officers at the end of Prohibition.

One possible scenario is that the state-licensed stores will have to drop their prices to remain competitive, while at the same time promoting the testing, safety and known potency of their product to justify its premium price over black-market marijuana. Otherwise, they might not get enough customers to stay in business.

And, as this industry grows up and goes straight, with professional growers and distributors and retail chains, it’s going to get even harder for the state to prevent really cheap pot from flooding the market.

“Once you legalize cannabis, production costs are going to drop dramatically,” says Beau Kilmer, co-director of the Rand Drug Policy Research Center. Kilmer is working with Kleiman to try to predict consumption patterns in Washington State, and he collaborated with Kleiman on the recent book, "Marijuana Legalization: What Everyone Needs to Know."

“Right now, when someone purchases marijuana or cocaine or methamphetamine, a lot of what they’re doing is compensating the drug dealer, and everyone else along that supply chain, for their risk of arrest, risk of incarceration, risk of violent assault," says Kilmer. "With legalization, that goes away.”

UCLA's Mark Kleiman says it will be difficult in the long run to maintain a level of cannabis pricing to the retail market that is low enough to undermine the black market -- in the way that most moonshiners were eventually driven out of the alcohol market after Prohibition -- while not creating a public-health crisis of rising use by the poor, poorly educated, and young people.

“I think you’d like to see a price that’s not much below the current illicit price, or maybe a little bit above it, but not so much above it that you keep the illicit market in business,” says Kleiman. “And that’s a very difficult needle to thread.”

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

Serious Medicine is a medical-marijuana dispensary in Olympia, Washington, with more than fifty varieties of cannabis, plus infusions, concentrates, and edibles. Director Forrest Escobedo is hesitant about applying for a license to sell recreational marijuana commercially from the storefront, as he would likely have to raise his prices to account for a 40-percent tax markup from the state.

Washington State is embarking on a novel experiment to license the legal production, processing, and sale of recreational marijuana (even though it is still illegal under federal law). Colorado is doing the same--both at the behest of voter initiatives. Regulations to launch the market at the beginning of 2013 are being drafted now. 

High-quality marijuana buds sit in mason jars behind the counter at a nonprofit medical-cannabis dispensary in Seattle, Washington. The state is moving toward licensing stores to sell recreational marijuana to all adults, without a prescription.

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