Marijuana legalization has proven that the most violent cartels cannot resist the powerful forces of market economics. Thanks to new market competition, Mexican drug cartels are beginning to experience serious losses on their operations. The effects will continue to diminish their business as marijuana prohibition is slowly repealed. Unfortunately for cartels, economics is not a one way street.
At first glance, it might appear that small scale legalization would not be significant enough to be a short term issue for cartels. However, statistics show the daunting effects of legalization. In 2006, the United States spent $33.7 billion on 4,285 metric tons of marijuana. However, as legalization has taken hold, so to have the sales. In Colorado alone, about 130 metric tons of marijuana were consumed in one year. While this may sound insignificant, it represents only a small portion of the entire market. There are over 1.1 million medical marijuana patients in the United States. At approximately $20 per gram, the implication is a dark future for cartels as prohibition continues to be repealed.
Mexico has been fighting a bloody drug war, which arguably stems from the U.S. drug laws. Of course, the U.S. also funds their battle with cartels. Considering the Mexican murder rate, it is safe to say they are also losing their drug war. However, the new developments in the marijuana industry have aided Mexican police. The Mexican murder rate declined 12.5% in 2013 and for the second year in a row. As cartels export less marijuana, their routine violence also becomes less frequent.
As their most profitable and voluminous export is subjected to market forces, cartels seek out new means to generate revenue. For example, there was a recent skyrocket in the price of Mexican limes. However, the increase did not stem from normal market forces. Cartels began to pirate shipments of limes bound for the U.S. Economically speaking, cartel resources are becoming more productive when used to do non-marijuana producing activities.
Legalization has unsurprisingly been a net loss for cartels and will continue to be. Their drag in marijuana does not mean they will profit more off other drugs. In fact, it means they will lose more there too. When drugs are illegal and carry similar penalties, the risk of arrest is equal. Thus, many users will want to maximize their utility to the extent of risks. However, when marijuana becomes legal, there is no risk of arrest so the “cost of using” is comparatively less. The result? Cocaine consumption has declined dramatically with legal marijuana.
For the classic liberal economist, watching the industry develop has been fascinating. Everything comes together through completely voluntary exchanges. From producers to financiers, the growth has been wild. The market doubled in 2014 and is expected to reach $6 billion by 2018. Thanks to start up financing companies, producers are rapidly expanding demand. Cartels will not sleep well knowing the U.S. grew 22 million pounds of legal marijuana in 2006.
While U.S. competition continues to beat out cartels, the United States government continues to undermine their efforts. IRS rules stemming back from the 1980s are hurting retailer’s ability to conduct business. One accountant has a client with an 80% tax rate. The problem has been your typical bureaucratic nightmare. Outdated legalese conflicts with new policies of today.
Marijuana will continue to be produced in increasingly large amounts. It has already become the nation’s biggest cash crop topping corn by over $10 billion in production value. Cartels will continue to lose their business even at higher retail prices. The U.S. economy will benefit from the growth generated by new demand. Hopefully policies will continue to change and these violent cartels suffer more losses at the hands of market economics.
