Jul 12

Here’s Why California’s Cannabis Black Market Won’t Go Away

As we all know, Prop 64 legalized cannabis for adult use in California. Voters gave it the green light in November 2016, paving the way for legal, licensed dispensaries to open their doors beginning in January 2018. Many Californians celebrated by flocking to dispensary doors and soon afterward consuming their first taste of legal, adult use cannabis. But that’s far from the end of the story.

Because Prop 64 gave local governments the power to decide their own regulations — or bans — with regard to cannabis businesses within their jurisdiction, California became riddled with a patchwork of partial legalization throughout its hundreds of independent localities. While certain places like Los Angeles, Sacramento, San Diego, and the Bay Area are now home to a number of licensed dispensaries and delivery services, other areas still exist in a state of de facto prohibition. And the illicit market does well in places without legal options.

Some lawmakers have tried to remedy the situation, with legislation like the now-shelved  Assembly Bill 1356, which would have mandated that municipalities where the majority of residents had voted in favor of Prop 64 lift their bans on legal cannabis businesses. And so many cities across California remain without legal dispensaries. 

It may come as a surprise that the illicit market flourishes in states with an established, legal market, but there are a few likely reasons for this. 

Some say that price is the driving factor behind it all: Consumers, if given a choice, will opt to pay less for what they perceive to be a similar product — and the unregulated market in California is cheaper because producers and sellers don’t have to pay the 15 percent state excise tax or the variable local taxes, nor do they have to invest in testing or other regulatory hurdles involved in licensure. 

Others say that it’s more about product availability and accessibility: Consumers have established their preferences and shopping routines and may choose a retailer that, while technically unlicensed, offers what they want in a convenient platform.

For some, the answer as to why the illicit market is thriving has more to do with relationships: If consumers have an established rapport with a small grower who is unable or unwilling to get licensed because of the high cost and labor involved in licensure or because the jurisdiction in which they operate is not issuing permits, that consumer may stay loyal—particularly because decriminalization has lowered the risks of doing so. 

There’s yet another factor involved when consumers buy cannabis on the illicit market, or what’s often referred to as the “traditional market”: They may not even know they’re doing it. Jackie McGowan, a cannabis industry consultant with K Street Consulting, told Civilized that there’s yet to be a clear way to guide consumers to licensed storefronts. “And if you can’t tell the difference, which one would you choose?” she asked. “The cheaper one, right?” Particularly in cities where dispensaries and delivery services are already up and running, it’s relatively inconspicuous for unlicensed retailers to hang a sign or hire a driver and start selling. Without the burden of licensure, they can charge less and take market share away from legal businesses. Of note, Governor Newsom signed a bill on July 1st raising the fine for illegal cannabis sales to $30,000 per day. Where enforced, this could provide more serious deterrence.

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