Marijuana Economics 101
Marijuana remains America's most popular illicit drug, and the U.S. market has been valued anywhere between $10 billion and $120 billion annually. Here's more on how experts determine the numbers.
Why do estimates of the U.S. marijuana market vary so widely?
It's hard to get any degree of accuracy when the data is limited and the commodity illegal, but it hasn't stopped analysts from scouring the available data to draw a multitude of conclusions.
Pricing the market is important -- even if it's imprecise -- because it helps state legislatures forecast prohibition costs, as well as potential tax revenues if they were to legalize the drug.
What's the primary data for supply-side estimates?
Most of it comes from the amount of marijuana seized by federal agencies each year. The crude rule of thumb is that seizure numbers roughly translate to 10 percent of overall domestic cultivation.
But even though the feds' seizure numbers have more than doubled over the last few years -- giving the impression that marijuana production has skyrocketed -- the size of these hauls still depend on the amount of resources and effort put in by law enforcement each year, as well as how hard growers and traffickers work to conceal their product.
Academic and marijuana reform activist Dr. John Gettman explains one example of supply-side pricing methodology in his widely cited 2006 market study. At the time he did the analysis, numerous government reports put the overall size of the domestic marijuana crop at 22 million pounds (that's 10,000 metric tons or 65 million plants).
Gettman begins by assuming a yield value for each plant in cultivation. (The yield is the consumable part of the product.) He assumes outdoor plants yield 7 ounces and indoor plants yield 3.5 ounces.
Then using price and consumption data from the government's annual marijuana use survey, he sets the production cost of marijuana at $1,606 per pound. (The cost to distribute and the eventual retail price per pound are much higher.) Multiplying the price to produce by overall cultivation give him an annual cash crop value of $35.8 billion.
Note, this dollar value is only for marijuana cultivated in the U.S. Gettman puts the total marijuana market, including that shipped in from Mexico and Canada, at closer to $100 billion. Others analysts have used similar methodologies but assigned different variables, which account for the general spread of supply-side assumptions out there.
Are consumption-based estimates more reliable?
Experts generally prefer consumption-based valuations, but this approach also comes with a set of variables that make it difficult to determine an accurate picture.
The most reliable data comes from the U.S. Department of Health and Human Services' Substance Abuse and Mental Health Administration, which engages the American public in a yearly household survey of drug use, including marijuana.
Specifically, the survey collects data on how many Americans aged 12 and older have used marijuana during the last year, in what frequency, and what price they pay per gram. An average joint is thought to contain between 0.5g and 1g of weed.
Currently 17 million Americans are classified as regular users, though many experts suggest increasing this by an estimated 20 percent because government surveys generally underreport. The survey results are also not the ideal measure of consumer habits because the participants self-report. Most people can remember how much they pay for weed, but far fewer can accurately recall the amount or the frequency. There are also multiple ways to consume cannabis besides smoking it, and it's often a shared activity, which also makes reliable data tough to pin down.
With these caveats, estimates based on consumer use and price have put the market in the range of $10 billion to $40 billion annually.
How much does marijuana cost on the street?
As of July 2011, the street price of high-quality pot per ounce ranges between $250 and nearly $500 depending on where it's bought, according to PriceofWeed.com, a crowd-sourced website that bills itself as the "global price index for marijuana." It's cheapest in Oregon, where it's $258/ounce, and most expensive in Washington, D.C. at $486/ounce. (Note: Click here for more on the methodology.)
How does potency affect price?
Potency depends on the amount of delta-9-tetrahydrocannabinol, or THC content, which ranges from low potency in commercial-grade cannabis to the high-grade, high-potency sinsemilla strain most often associated with medical marijuana use. The price per gram is roughly proportional to the THC content.
According to National Drug Intelligence Center research, the prevalence of higher potency products such as sinsemilla has increased the average overall potency, but these highly potent strains account for a maximum of 20 percent of the U.S. market. Jonathan Caulkins, the co-author of several studies for the Drug Policy Research Center at the RAND Corporation describes the marijuana market as a "Wal-Mart, not a Whole Foods market," where more than 80 precent of users are buying the cheaper, less potent commercial grades.
Where's all this pot being grown?
Based on federal seizure numbers, California is the top marijuana-producing state, and in a league of its own by one estimate. Within the state, the top cultivation counties are Lake, Tulare, Shasta, Mendocino and Humboldt counties, all located in Northern California.
The other top marijuana-producing states are Hawaii, Kentucky, Oregon, Tennessee, Washington and West Virginia, according to the most recent DEA numbers. Most of the trafficked marijuana from outside the U.S. comes from Mexico, Canada, Colombia and Jamaica.