How big will legal weed get? 2 factors limit market size, even if US legalizes cannabis.
- Nobody can tell from smoking, vaping or eating the product whether it’s legal or illegal.
- Legal weed has one big advantage: innovation in technology and business practices.
Even in volatile economic times, weed industry analysts and pundits are bullish about the future of legal weed. Predictions of an American legal weed industry with total retail sales as high as $100 billion by the end of this decade abound. How realistic are such numbers?
Projections about weed market revenue are uniquely difficult. There are lots of moving parts in play, with state regulations and taxes changing rapidly and the looming prospect of federal legalization coming in as-yet-unknown form. But we think anyone who projects a $100 billion weed market by 2030 is looking through rose-colored glasses.
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Two major factors severely limit how big legal weed can possibly get in the next decade:
1. Illegal weed beats legal on price
Illegal weed is a low-cost substitute for legal weed that’s widely available everywhere in America. In virtually every state that has legalized cannabis, elaborate regulations and high taxes make legal weed much more costly to produce than illegal weed, and much more expensive for consumers.
Legal weed does tend to have fancier packaging, labeling and safety certifications that illegal weed doesn’t have, and some consumers are willing to pay extra for these things. But nobody can tell from smoking, vaping or eating the product whether it’s legal or illegal. For most price-sensitive consumers, the advantages of legal weed just aren’t worth the extra money.
Some proposals for federal legalization threaten to pile even more taxes and regulations on top of those already in force. Too much taxation and regulatory baggage is a recipe for legal weed to stagnate and for illegal weed to flourish. The more expensive legal weed is, the more people choose illegal weed – especially the consumers who buy the most weed, and thus care most about the price difference.
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Legal weed has one strong weapon in its battle with illegal weed: As the industry expands and matures, technology and business practices will improve. In spite of heavy regulation and taxation, legal weed will start to look more typical, like other innovative agribusiness industries. Costs and prices will come down, making legal weed more competitive price-wise with illegal products.
2. Falling legal prices can limit revenue
As legal weed gets cheaper and more competitive, revenue is unlikely to grow by much, even as the quantity increases.
Revenue equals price times quantity. So if quantity rises because prices fall, then the total size of the legal weed market as measured by total revenue could increase modestly, stay the same or even decrease.
Plus, illegal weed isn't going anywhere. Even if illegal weed businesses can’t readily adopt all the same innovative technologies and practices as legal ones, they can and will take advantage of some improvements – such as more efficient lighting and more productive strains with better yields. And as ever, they won’t be subject to taxes or regulations, which also aren’t going anywhere.
Will the size of the legal weed market ever reach $100 billion? Maybe, in nominal terms – with enough inflation, even the pet rock industry could reach $100 billion. In real (inflation-adjusted) terms, though, we think maybe the analysts with such inflated predictions have been smoking something.
Why an overvalued cannabis market matters
Why should we care when analysts overvalue an industry?
►Bad information leads to bad investments, and a lot of people lose their money. When Matt Damon hawked cryptocurrency during the Super Bowl, he said: "Fortune favors the brave." Crypto turned out to be vastly overvalued, and a lot of everyday people got hurt. Many investors were suckered into what sounded like easy money, and personal harms rippled through the country.
►Investment hype diverts money from productive investments in less glamorous parts of the economy. Good, profitable companies in other industries, who compete for the same funders, have a harder time finding the money they need to grow.
Well-informed investment allocations reward investors, create jobs and lead the economy to produce more of what people want most.
Robin Goldstein is director of the Cannabis Economics Group and an economist in the Department of Agricultural and Resource Economics at the University of California, Davis. Daniel Sumner is a distinguished professor in the department. Their book, "Can Legal Weed Win? The Blunt Realities of Cannabis Economics," was published this month.
This column is part of a series by USA TODAY Opinion about police accountability and building safer communities. The project began in 2021 by examining qualified immunity and continues in 2022 by examining various ways to improve law enforcement. The project is made possible in part by a grant from Stand Together, which does not provide editorial input.