Mark A. R. Kleiman has a post entitled The Supreme Court meets illicit-market economics from June 1 that was very interesting. As much as I disagree with the opinion in Wickard v. Fillburn, and as much as many of the Justices disagree with this ruling, Kleiman hits on a point in his post that makes the Federal position much stronger:
-[Note: Mark Kleiman does not seem to think this is likely to happen although he addresses it as follows.]
(Of course, that's only a partial analysis. If having an exemption for medical pot made cases against people growing pot for the non-medical market harder to investigate and prosecute, the result might be to reduce the effective level of enforcement pressure. And if the existence of a large, open medical-cannabis market somehow increased demand for cannabis for non-medical use -- for example, by making the drug seem safer to potential users -- that might easily swamp any direct effect of removing patients' demand from the illicit market.)
Potentially, allowing a market in marijuana even for medicinal use may make it harder to prosecute recreational users. This would in turn drive prices down for illicit marijuana across the country. Thus, this state policy becomes a matter of interstate commerce, and the Justices can eliminate Wickard from their opinion and still find for the Feds.
Why will it drive down prices? Mark Kleiman seems to think that even if the preceding scenario were to happen, the proportion of illicit marijuana in California would have no substantial impact on prices nation-wide. He argues that:
In the case of marijuana and other illicit drugs, the dominant cost facing any producer is the cost imposed by law enforcement (employees and principals alike need to be compensated for their risks of arrest and imprisonment) and the cost of evading law enforcement.
Roughly speaking, the enforcement risk faced by the average drug transaction depends on the ratio of the volume in that market to the enforcement effort devoted to suppressing it. If there's one dealer on a street corner and one cop patrolling it, the dealer is much more likely to get busted than if the same cop confronts 100 dealers. That "safety in numbers" principle is why prey animals herd.
So if we take some of the demand out of the illicit marijuana market in a way producers in that market can predict, they will likely reduce the amount they produce. If we leave the enforcement effort constant, each remaining kilogram of pot faces more law enforcement. Thus we would expect the price of illicit pot to rise (trivially, as Barnett noted, because the proportion of total cannabis demand that is "medical," even under California's loose standards, is a small fraction of the total) as a result of removing medical demand from the market.
If it is harder to prosecute those in the illicit market in California, we can safely assume that the operating costs will decrease, but Kleiman posits that the dealers will reduce the supply available in California. Even so, because the cost of operating in California has decreased more illicit sales will take place in California.
This is the same operating principle that gives businesses that don't have to pay sales tax in another state the ability to offer the product for a lower price. In states where the operating costs of dealing marijuana are high, those dealers will have to compete against the California dealers. This in turn will keep prices down nationwide.
It may be true that the California dealers will decrease the supply they offer in California in order to keep the prices there artificially high, however the outcome will be to decrease the prices that would have been paid in other states.
For more information about this case check out Drug War Rant's stellar information.