Proposition 19 and the price of peppers in BC

Proposition 19 is the ballot initiative in California that, if passed, will legalize the possession and cultivation of small amounts of marijuana for personal use. As economists, we get to ignore the ethical and political implications and focus only on the impact on markets. The Globe and Mail published and interesting article on Saturday about the implications for BC (click here for article).

There are some issues in the article that we believe need clarification. The first has to do with the increase in demand and supply of pot in California if Proposition 19 is approved. We agree that the cost of marijuana will fall, but only because of the reduction in risk, not due to economies of scale. Marijuana would still be illegal under the Federal Controlled Substances Act and thus, large scale facilities are not likely to emerge due to the threat of federal prosecution. There are roughly 37 million people living in California and there aren't enough DEA agents to arrest all users, only commercial growers. The demand for marijuana is not likely to increase if it is legalized. We need only look at the number of people that speed, run red lights, use cellular phone and refuse to buckle up to know that people don't obey laws. If the benefit exceeds the cost, people will break laws. The penalty for possession of small amounts of marijuana is trivial so the risk is not likely to change. The price of marijuana will almost certainly decrease (depending on the tax) and usage may increase.

Secondly, the author makes some claims about the economic effects on BC. There will be no reduction in BC's GDP, only because the marijuana trade is illegal and not included in GDP in the first place. Likewise, the people employed in the marijuana industry do not show up on Statistics Canada employment numbers and those wouldn't change either. The article implicitly assumes that all marijuana cultivated in BC is shipped to California. The US has a population of 310 million. (On a recent trip to Florida, I was golfing with some gentlemen from Baltimore. When the learned I was from BC, they commented that we grew great bud ... I don't think they meant beer)

If, and when marijuana is legalized in California, BC would stand to benefit by also legalizing the cultivation of marijuana. We have several greenhouses that currently grow bell peppers that retail at $1.99/lb. Enterprising  greenhouse owners would remove those crops and replace them with marijuana. That would be the short term response. The long term response would be the construction of more greenhouses and an expansion of the industry, taking advantage of the economies of scale. GDP in BC would rise (now legal) as would the tax revenue of the provincial government.

The downside is that with the removal of the pepper crops, bell pepper prices would rise in BC.