July 4, 2022

Robin Goldstein and Daniel Sumner are economists at UC Davis and co-authors of Can Authorized Weed Win? The Blunt Realities of Hashish Economics. On this podcast, Motley Idiot producer Ricky Mulvey talks with them about:

  • How federal legalization may assist or damage weed traders.
  • Financial classes from pot legal guidelines in Oklahoma and California.
  • One stunning manner that weed is like bacon.

To catch full episodes of all The Motley Idiot’s free podcasts, try our podcast heart. To get began investing, try our quick-start information to investing in shares. A full transcript follows the video.

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This video was recorded on June 4, 2022.

Robin Goldstein: However what’s extremely elastic is the substitution between authorized and unlawful, and that’s a giant theme in our e-book. Individuals don’t have a variety of compelling causes in lots of circumstances to purchase the authorized stuff when the unlawful stuff is on the market at half the worth.

Chris Hill: I’m Chris Hill, and that was Robin Goldstein, an economist on the College of California, Davis, and co-author of the upcoming e-book entitled, Can Authorized Weed Win?. At the moment we’re going to speak about some primary financial ideas by way of the lens of weed. It’s been mentioned that pot makes films and meals extra fascinating, so why not demand curves? Come on. In case you’ve been listening to the present for some time, you already know, this isn’t your grandpa’s monetary present. Ricky Mulvey talked with Goldstein and his co-author Daniel Sumner about their new e-book and why it’s been so tough for traders to search out alternatives on this rising area.

Ricky Mulvey: Howdy, Fools. We’re utilizing weed as a gateway drug to get you hooked on economics in the present day. Becoming a member of me now are Robin Goldstein and Daniel Sumner. They’re co-authors of the e-book Can Authorized Weed Win? and economists on the College of California, Davis. Welcome, Robin and Daniel.

Robin Goldstein: Thanks, Ricky.

Daniel Sumner: Morning.

Ricky Mulvey: Beginning off, why are the economics of weed fascinating to you? Daniel, I do know you’ve significantly had an curiosity on this for 4 many years making an attempt to survey weed growers in California.

Daniel Sumner: Yeah, effectively, I do the economics of meals, wine, Robin likes to name all ingestibles, and it was simply pure to consider hashish in that context. You’re proper, again after I was a child economist, one of many first issues I considered doing an empirical research on was the economics of weed farming or hashish farming again when it was significantly unlawful in all places. We put out a survey, my buddy and I, and we knew we have been in bother when even his brother wouldn’t return our survey. At that time, we determined to be theorists and quit making an attempt to get information on weed. However 4 many years later, I jumped again into it in a giant manner.

Ricky Mulvey: Robin, how about you?

Robin Goldstein: Weed is basically fascinating as a subject in economics due to this battle between authorized and unlawful, that you just don’t have the equal of it in nearly every other market. You’ve had a market that’s been unlawful for many years, for a lot of the century, and then you definately abruptly have the introduction of a authorized market. Individuals have been getting their weed illegally. They’ve been getting good things from individuals they know. They know the place to get it, they know methods to get it. Then impulsively you launched this large authorized market and arrange a bunch of latest laws and taxes and the state arrange a complete new system for individuals to get authorized. The query is, what motivates shoppers to maneuver from the unlawful market to the authorized market, and what allows companies to reach the authorized market? That’s tremendous fascinating. It’s actually onerous as a subject in economics due to the dearth of historic information, you don’t have costs and portions the way in which you do for many different industries and so now we have to get our information in some fascinating and difficult methods. However I believe it’s a subject that’s very enjoyable and in addition illuminating when it comes to public coverage points.

Daniel Sumner: Let me add one fast factor to that, and that’s that is being performed again and again. The nation of Canada has very elaborate and fascinating laws, the state of Massachusetts, Oklahoma going its personal route in an fascinating manner. We’ve a lot of samples of various governments legalizing, if you’ll, in several methods. Economists love to review financial laws, and this can be a nice instance of that.

Ricky Mulvey: Yeah, I’m making an attempt to suppose there’s actually no merchandise that you could possibly use as a parallel when it comes to primarily authorized and unlawful outdoors of perhaps truffles could be there. However you guys talked about among the ties between weed and different agricultural merchandise. You talked about that weed will also be like bacon when it comes to value elasticity. How is that?

Daniel Sumner: Let me simply say, for some individuals the worth of bacon goes up, they don’t change very a lot, they obtained to have their bacon. The identical’s true for weed, after all, the distinction is you don’t have for a lot of shoppers an actual shut substitute for bacon. I’ll have a bit of ham within the morning, and I’ll eat bacon with eggs or I could also be a vegan. However for authorized weed, you’ve gotten, as Robin says this, what appears to be a fairly shut substitute for plenty of potential patrons. That makes it a difficult business to be in. In case you say, gee, I believe I’ll increase my value as a result of clients need this product. If they’ve an excellent various, perhaps Coke and Pepsi for a few years for instance, a lot of shoppers are fairly detached between which one. Then there’s the low-price retailer model as effectively in that case. There are parallels with meals objects and drinks and the like, however you’re proper, there’s no good mannequin for us.

Ricky Mulvey: In your analysis for Can Authorized Weed Win?, what did you find out about value elasticity particularly, within the authorized market, you’re seeing states like, let’s say, Oklahoma and Colorado on the lower-end, the place perhaps there’s somewhat bit much less regulation, after which states like Illinois the place it’s taxed all the way in which and also you see the authorized market very a lot working up towards the unlawful market?

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Daniel Sumner: The actual problem is having information to essentially estimate that.

Robin Goldstein: It’s actually onerous to have historic information on elasticity. However once we take a look at the entire market, authorized plus unlawful, all weed, then we are saying, that’s fairly inelastic as a result of if the worth of weed goes up or down somewhat bit and individuals who smoke usually need to get their weed their manner, and so we expect it’s fairly elastic. However what’s extremely elastic is the substitution between authorized and unlawful, and that’s a giant theme in our e-book. Individuals don’t have a variety of compelling causes in lots of circumstances, to purchase the authorized stuff when the unlawful stuff is on the market at half the worth, and even three-quarters of the worth. If the unlawful stuff, you’re taking it out of the bundle, you smoke it, you get the identical feeling, nobody can simply examine a flower or a smoke a joint and say, oh, from the style or odor of that, or the results on me, I do know whether or not that’s authorized or unlawful. Basically, the merchandise are very comparable, the unlawful and the authorized stuff. That’s why we expect that it’s a fairly elastic substitution between these two items.

Daniel Sumner: That available in the market as a complete, clearly there are particular person shoppers. Some individuals will say, gee, I don’t need to mess with an unlawful market. I’m going to purchase it down on the mall or from someone that’s obtained a state license and is licensed in numerous methods, or perhaps they are saying, gee, I belief the federal government to examine this product, so I believe it’s safer. The product itself is safer. These are perceptions that folks have. The identical factor occurs in different markets. After all, there are those that say, I’m solely going to purchase milk if it’s natural. There’s an enormous value distinction there.

Natural milk is double the price of typical milk. However some persons are satisfied that’s the route they’re going to go, and costs clearly haven’t saved them out of the natural marketplace for milk. For the market as a complete, there’s substitution there. We all know that taking a look at tons and plenty of merchandise, and Robin’s level that the bodily product most individuals can’t inform the distinction, issues to a variety of shoppers, and lots of people are on the low finish. Parallel with wine once more, a lot of the wine bought isn’t $200 a bottle Napa Valley cabernet sauvignon, a lot of the wines bought come from the broad acre agriculture the place wine grapes are grown as a commodity. The identical factor occurs with weed.

Ricky Mulvey: You guys do point out within the e-book there’s two photographs of, that is authorized weed and that is unlawful weed, attempt to spot the distinction. However there are some benefits to a authorized market which you’ve gotten common working hours, you may need extra decisions for a client, lots of people don’t need to purchase issues illegally, and I believe that can be an enormous client driver of choice whenever you open up the market. You guys additionally speak about one other tough half for traders, is discovering the full addressable marketplace for weed, and there’s a variety of sky-high expectations from a variety of Wall Avenue banks. Why do you disagree with that after which have primarily the full addressable weed market near what it’s now, even with full federal legalization probably on the horizon?

Daniel Sumner: Let me leap in that in a short time after which I’ll flip it over to Rob, and the most important level is to get quantity to increase for authorized weed, costs have to be extra aggressive, so costs come down. Secondly, there’s a lot of room for innovation that lowers value of manufacturing on the authorized weed facet, simply the improvements now we have routinely for corn or kale, higher farming strategies and improved lighting and all these issues, technical modifications that may convey costs down, which will effectively permit portions to increase, however you convey down value, your amount expands, income might keep the identical, so once we say the full dimension of the business measured, say by product sales income, we see there are pressures to maintain that not that a lot greater than it’s now. We emphasize the unlawful weed as competitors, however authorized remains to be 1 / 4 of the entire market in some locations as much as half of the entire market in different places.

Robin Goldstein: As extra states legalize, in the event you’re trying on the complete U.S. market, extra states legalize, after all, you develop the authorized market by quantity. As Dan mentioned in the long term if costs come down, the full addressable market dimension is value occasions amount, and so if in case you have lowering costs and growing portions, these two results counteract one another, and so the full market dimension as measured by whole retail gross sales might or might not go up so much. There are lots of people on the market who say, oh, you legalize weed and the quantity of whole weed consumed simply goes manner up. There’s at all times individuals on the market who simply begin smoking weed abruptly when it’s authorized and who’ve by no means smoked earlier than. The info doesn’t actually appear to assist that idea, and whenever you take a look at historic information going again within the Netherlands and different locations all over the world, you don’t see legalization tending to trigger an enormous improve, perhaps there’s somewhat modest improve within the quantity of weed whole consumed, however we don’t suppose that’s a giant impact, and in order that’s one other false impression we expect that’s getting used to drive some overly excessive estimates of the full market dimension sooner or later.

Ricky Mulvey: I’ve heard a variety of legalization proponents give the image of, hey, why wouldn’t you need authorized pot? You possibly can simply tax it a lot, after which individuals will get pleasure from that and also you guys push again towards that in your e-book, are you able to describe why?

Daniel Sumner: It’s actually a mix of taxes and laws and never simply the taxes, so in a variety of states, individuals have additionally mentioned, oh, this can be a new authorized enterprise. Right here’s each regulation now we have ever imagined, we’d wish to placed on something, we’ll put all of them on weed, we would like it to be completely secure, completely wholesome, completely pure because it’s being grown, and we’re going to control when the shops are open and once they’re closed, and all the things else you possibly can title and each a type of laws is expensive, so we wish to say great laws, however they’re not free and you’ll want to take that into consideration, and then you definately begin paying taxes on high of that.

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California’s governor introduced just a few days in the past that he’s going to attempt to get rid of the cultivation tax a minimum of briefly, we’ll see if it occurs, however right here as in different places, it’s taxed all the way in which up and down the provision chain, each on the state degree and on the native degree. The worst factor on this planet for traders, I believe could be federal legalization that added a complete new degree of laws and taxes on high of all that we’ve obtained now, and in that sense, federal legalization could also be a drawback for the business, sadly, simply because it might be dealt with in a manner that makes it that a lot tougher for individuals to have the business be a hit.

Ricky Mulvey: What are among the classes from California’s lengthy historical past of legalization? You guys spend a while on Prop 64 and a variety of unintended penalties there, significantly with public consumption and that type of factor. As you checked out a few of these laws, what did you be taught?

Daniel Sumner: Let me leap in and say they’re simply two fast issues there. One is in some methods, by making it authorized, you made it unlawful, and what I imply by that’s, California had a really lengthy historical past of medical hashish medicinal or medical hashish that was very evenly regulated and had only a few guidelines to be authorized, the buyer needed to have a use card, they obtained that from a physician. You may get it in quarter-hour on-line. Some individuals did, and there have been retail shops referred to as dispensaries, however the provide chain was unregulated and untaxed, and that meant people who find themselves on the farming facet of the processing facet, the manufacturing facet, we’re doing issues actually with none laws or taxes, after which whenever you legalized it for grownup use, they got here in with a complete vary of issues that folks needed to adjust to, together with getting a license, which many corporations, massive and small within the medical weed enterprise discovered it inconceivable to do, not as a result of the laws have been too onerous, however for instance, you needed to make preparations domestically.

Rent your legal professionals, hire your area, do all that then wait two years to get a license, and that was only a monetary demand that folks within the weed enterprise couldn’t do, in order that they thought they have been authorized earlier than and so they grew to become unlawful, and that was actually tough on a variety of companies there. The at present working system has streamlined a few of that, nevertheless it’s nonetheless the case. Let me provide you with Robin’s favourite regulation to level to. I’ve been advised, I don’t know, I am going to mattress early, however I’ve been advised individuals smoke weed after 10 o’clock at night time, and a few individuals need to discover the product after 10 o’clock at night time, however the state regulation says any authorized weed enterprise closes at 10 o’clock on the newest, so what do you do? You’re having a celebration, in the event you needed to get a six pack of beer you’d go down the shop and purchase a six pack of beer, however if you would like weed, the unlawful market is the one factor out there to you, and also you ask, why would you need to drive individuals to the unlawful market in the midst of the night time?

Daniel Sumner: It’s onerous to image why you’d have a regulation to need to try this. Nevertheless it’s all very effectively supposed, however doesn’t appear to seize actuality effectively because it ought to.

Robin Goldstein: I used to be simply going so as to add that when you’ve gotten these laws, you have been speaking about dependable opening hours. It’s ironic, having these dependable, predictable opening hours that results in the case of the ten:00 p.m. curfew, shifting market share away from authorized and towards unlawful. I used to be simply going so as to add that within the previous system earlier than all these laws and taxes went into impact in 2018, you had simply the medical market. It was restricted to in-state shoppers and it was restricted to individuals who had a California ID, 18 and over and had a physician’s advice. The physician’s advice was very easy to return by, and in order that wasn’t that a lot of a limiting factor. It was primarily a really open and free market and also you had low costs and a variety of competitors for high quality.

There have been different issues that went into impact after the extra closely regulated market. For instance, shoppers may go right into a retailer earlier than. With the previous medical system, they might go right into a retailer and odor and examine the buds from a giant jar. It’s nonetheless in its infancy, this client consciousness or understanding of what the product is and methods to consider high quality. However one of many large methods is you odor it. You decide it up, you maintain it, you odor it, you take a look at the bud. You possibly can at all times try this. They take a jar and you could possibly take a look at the merchandise and that’s how you could possibly determine between manufacturers or between completely different strains. Now with the packaging laws, you possibly can’t try this. It’s all pre-packaged and it’s usually an opaque packaging. Generally they offer you somewhat pattern in a glass jar, however you possibly can’t odor it and you may’t maintain it and take a look at it. That’s once more one other strain which may make individuals need to keep within the unlawful market as a result of the unlawful seller goes to permit them to have a look at stuff and examine it.

Ricky Mulvey: On the very least, it turns into way more tough to promote whenever you don’t have that tactile expertise. On the flip facet of California, you guys spotlight Oklahoma. What are among the financial classes you guys discovered from Oklahoma, which has a really low priced weed, however as of now only a medical-only market?

Robin Goldstein: Oklahoma is a extremely fascinating case that we speak about within the e-book, in Can Authorized Weed Win?. One of many causes it’s so fascinating is as a result of it’s medical-only as you say. However the density of dispensaries, of shops, is way greater than wherever else within the nation. Oklahoma has extra dispensaries or extra retail retailers the place you should purchase authorized weed than California does, with the inhabitants one-tenth the dimensions. They’re simply on each road nook. It’s a aggressive market. Some individuals will fail.

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Perhaps in some circumstances, there are too many shops and there’s fierce competitors, nevertheless it’s good for shoppers. Total, the business there’s actually sturdy and rising quick despite being medical-only. We predict one of many foremost causes for that’s they only made it very easy to get a license. You apply for a license, it’s like getting a looking or fishing license. You ship within the paperwork, and also you get again the license and you’ve got the state’s go-ahead to open the shop. The story we like to inform is that in Oklahoma, the period of time that elapsed between the passing of the poll query, legalizing medical weed, and the primary shops opening was about 9 hours. The shops opened the following morning after the poll query handed. In Vermont, the poll query handed and 4 years later they nonetheless don’t have a single retailer open.

Ricky Mulvey: You guys write, quote, “Outdoors traders have already misplaced huge quantities of cash on authorized weed, and we anticipate that until the state of affairs modifications, many will proceed to take action.” What situational elements are you speaking about there?

Robin Goldstein: Laws and taxes coming again right down to Earth when it comes to making viable companies extra attainable. It varies dramatically by state. In Colorado and Washington, you do see a authorized weed market that’s extra aggressive with unlawful as a result of the costs are a lot decrease. Alternatively, when the costs are a lot decrease, you don’t make as a lot cash with [laughs] unlawful weed enterprise. As soon as there’s interstate commerce, which is one thing that may in all probability include federal legalization, you will notice these alternatives for bigger scale for corporations that may actually be nationwide scale. As an alternative of opening many companies in 20 completely different states, just like the multi-state operators are doing now, you should have the power to essentially have extra centralized services and actually environment friendly manufacturing. There will probably be some winners in that sport for certain, however who is aware of the place they’re going to be? Perhaps they’re going to be in Wyoming or Oklahoma, or perhaps inside a nationwide commerce, perhaps Saskatchewan goes to turn out to be a giant participant or Mexico.

The issue is that for states the place it’s actually costly proper now to supply due to native laws and in addition simply greater priced locations which might be for financial elementary causes like excessive electrical energy prices or excessive labor prices, water, simply the enter prices are excessive, these locations are going to have a tough time competing, similar to they’ve a tough time competing. Massachusetts isn’t very aggressive within the avocado market, [laughs] and we don’t anticipate that it’s going to be that straightforward for Massachusetts corporations due to local weather and different elements, it’s not that low cost to supply weed there. It’s going to be onerous for them, too, to compete in exports. There’s going to be some focus of manufacturing in locations which might be low cost and favorable and with favorable local weather circumstances coming to dominate the market. I believe that’s what traders want to consider actually lengthy and onerous.

Ricky Mulvey: Robin, you’ve carefully studied how advertising and marketing impacts perceptions, particularly within the case of high-priced wine. Is there a giant distinction in how shoppers eat or understand high-end weed? Are there parallels with the flower, the oils, vapes, edibles?

Robin Goldstein: Yeah. The way in which I obtained into economics initially very long time in the past was due to blind wine tastings. I used to be interested by why individuals couldn’t inform the distinction between $100 wine and a $5 wine in a blind tasting. Why do individuals need to spend a lot extra on wine whenever you pour out the liquid from the bottle, otherwise you cowl up the label and folks can’t inform the distinction or don’t desire the costly product? You’re seeing that in weed in spades. I believe much more than with the wine or beer as a result of the buyer understanding of this product is simply so rudimentary and its infancy is simply one thing that’s been unlawful. You get weed from some dude on the road and [laughs] you’re probably not like analyzing the standard of it very effectively. You’re seeing the emergence in authorized market of a variety of very high-end manufacturers. There’s a notion, there’s a typical perception that, for instance, the best efficiency weed is the best high quality and due to this fact the most costly. The actually fancy costly stuff is 30%-32% THC.

The cheaper stuff is 20%, 25% THC. That’s one of many hallmarks of pricy fancy weed in the mean time. Curiously, there’s truly little or no scientific proof that the efficiency as measured by THC content material is definitely that effectively correlated with both how excessive it will get you or how top quality the results are. Which may be a purple herring when it comes to measuring high quality. Individuals don’t consider the standard of the wine based mostly on what alcohol proportion it’s. The opposite issue that you just see is these designer strains, modern strains of weed. For instance, proper now, purple strains are very talked-about and are commanding greater costs available in the market. I see that as a trend development. As with wine, this stuff come and go and ebb and circulate. You have got, this 12 months it’s a purple weed, subsequent 12 months it’s going to be orange weed, who is aware of. It’s simply chaos. [laughs] I believe that it’s essential for shoppers to look previous the hype on these supposed high quality markers and simply strive issues and work out for themselves what they like and don’t like. It could have little or no to do with the worth.

Ricky Mulvey: Robin Goldstein, Dan Sumner, authors of Can Authorized Weed Win?. Thanks a lot for becoming a member of us on Motley Idiot Cash.

Daniel Sumner: Thanks.

Robin Goldstein: Thanks for having us, Ricky.

Chris Hill: As at all times, individuals on this system might have an curiosity within the shares they speak about. The Motley Idiot might have formal suggestions for or towards, so don’t purchase or promote shares based mostly solely on what you hear. I’m Chris Hill. Thanks for listening, we’ll see you tomorrow.

Chris Hill has positions in PepsiCo Inc. Ricky Mulvey has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.

The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.