Economies of Scale and Illegal Drugs

Real prices for illegal drugs have dropped dramatically since the 1970s due to the same technological forces that have boosted globalization in other industries.  For example, the price of cocaine dropped in half in Europe between 1990 and the early 2000s. But compared with legal pharmaceuticals and agriculture, illegal drug businesses are still incredibly fragmented and inefficient.

Some rare light was shed on the [drug] business by a [British] Home Office study in 2007, in which 222 drug-dealers were interviewed in prison by analysts from Matrix Knowledge Group, a consultancy, and the London School of Economics. ...Most drug businesses are forced to stay small and simple to evade the police. Only one dealer claimed to be part of an organisation of more than 100 people, and a fifth were classified by researchers as sole traders. Fear of being uncovered also hampers recruitment: most dealers stuck to family and friends, and people from the same ethnic group, when hiring associates. Just like other businessmen, they carried out criminal-record background checks on potential employees—except that, in this case, a record was a good thing.
Kevin Marsh, an economist at Matrix Knowledge, argues that most players in the drug business have a poor knowledge of the market. “Shopping around for new wholesale suppliers is risky, so many retailers stick to the same one and pay over the odds,” he says.

Colorado, Washington state, the Netherlands, and a few other places have legalized the possession and use of marijuana, but these experiments only legalized possession and the industrial-scale production and dealing is still illegal.  This is still nothing like what full legalization would look like.  If agribusiness giants like Monsanto began breeding new strains for greater productivity and if tobacco giants like Phillip Morris developed processing and retail giants like Walmart did the distribution, then marijuana would be so cheap, it would be given away for free at some places because it would be cheaper than a packet of free sugar or ketchup at McDonalds.

marijuana is a nonperishable bulk commodity like wheat or lentils. For such commodities, the final price to the end user is dominated by the cost of production.
Try to imagine a world in which you’re allowed to have some tomatoes in your house, you’re allowed to cook tomatoes, you’re not punished for having tomatoes in your possession if the cops stop you, and you’re even allowed to buy tomatoes at specialty tomato stores—but where it’s illegal to actually grow tomatoes. The price of tomatoes is going to escalate enormously. The problem isn’t [just] that the tomatoes will suddenly disappear from supermarket shelves (though they will) but that all the farms will have to shut down. Which isn’t to say that nobody will grow tomatoes. People like tomatoes. So tomatoes will be smuggled in from Mexico. Tomatoes will be grown in backyards. People will use lights and hydroponic rigs to grow tomatoes indoors.

The tomato price would skyrocket because the new tomato production methods would be so much less efficient compared with modern industrial methods for producing and distributing tomatos.

America’s farmlands are some of the most productive in the world, thanks in no small part to technology and the existence of scale sufficient to leverage that technology. Even what Americans think of as a small family farm is quite large compared with an illicit marijuana operation. There are no amber waves of cannabis anywhere in the world today, but under a true legalization regime there would be. And this makes all the difference.

How cheaply could pot be grown with advanced farming techniques? One potential data point is Canada’s industrial hemp industry, where production costs are about $500 per acre. If the kind of [low-grade] commercial weed that accounts for about 80 percent of the U.S. market could be grown that cheaply, it implies costs of about 20 cents per pound... [Better quality] marijuana is grown from more expensive transplanted clones rather than from seeds. Even so, the authors note that “production costs for crops that need to be transplanted, such as cherry tomatoes and asparagus, are generally in the range of $5,000-$20,000 per acre.” That implies costs of less than $20 per pound for [top quality] and less than $5 a pound for mid-grade stuff. Another way of looking at it, suggested by California NORML Director Dale Gieringer, is that we should expect legal pot to cost about the same amount as “other legal herbs such as tea or tobacco,” something perhaps “100 times lower than the current prevailing price of $300 per ounce—or a few cents per joint.”

This would make pot far and away the cheapest intoxicant on the market, absolutely blowing beer and liquor out of the water. Joints would be about as cheap as things that are often treated as free. Splenda packets, for example, cost 2 or 3 cents each when purchased in bulk.

At those prices, pot prices would not only blow alcohol out of the water, a joint would be cheaper to serve than water itself.  A 'free' paper cup of water costs McDonalds more than a few cents.  A pound of pot is enough to make 800 joints and it could be produced for as low as 20 cents.