Legal prices should and do exceed black market prices

Jacob Sullum of Reason says black market prices should be higher than legal prices.  I disagree.

He notes that black market prices in Colorado are lower than legal prices:  “legal pot was selling for about 50 percent more than black-market pot.”

He then says, “That situation seemed to contradict basic economic principles. Because of the “risk premium” associated with prohibition, black-market prices should be higher than legal prices, not lower.”

No!  That analysis looks only at the supply side – what producers face.  On the demand side – what consumers face – why would anyone pay extra for black market product?  Legal product offers recourse against the seller, if a problem develops.  Branding should add value, not subtract value.  The same goes for packaging.  Legal product should be safer.

Looking only at the supply side misses the main point.  If the bootlegger’s price is too high — higher than the legal price — he goes out of business.  That’s the point.

When Junior Johnson was running moonshine in the 1950s, “A gallon of whiskey [bore] $11 tax.  You could make it for 75 cents to a dollar and sell it for $3 or $4.” Golenbock, American Zoom.  Bootlegged product needs to be cheaper.  Those cigarettes smuggled into New York from South Carolina:  do people really pay extra for those?  Whatever risk premium the illegal seller faces makes no difference — and should make no difference — to the buyer.  Bootlegged prices need to be lower.  And they are.  But Jacob Sullum has been studying prohibition longer than I have, so maybe I’m missing something.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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