Will Legalizing Pot Solve Calif. Budget Woes?

By at least one estimate, California's largest cash crop is not milk, cheese, or oranges, it's marijuana. Some advocates say legalizing pot — and taxing it — could be a way out of the state's financial woes, and they recently secured enough signatures for a ballot initiative to do just that. But how much revenue a legal pot industry generates would depend on how prices are set.

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And it isnt just Los Angeles having budget trouble, the whole state is in the throes of a full-blown fiscal crisis. But it looks like Californians may get the chance to vote on a novel way to help balance the books. The proposal? Legalized pot, then tax it. So, how much money would that raise? Well, that depends on complicated economic questions like what would a joint sell for on the open market?

Heres NPRs David Kestenbaum with our Planet Money team.

DAVID KESTENBAUM: Right now, the price of marijuana varies a lot. The government actually studies these things. Researchers go into holding cells or if people have been arrested and asked questions like what do you pay for marijuana?

According to a report published in 2004, pot in some parts of the country can cost two or three times as much as in another.

Ms. ROSALIE LICCARDO PACULA (Acting Director, RAND Health; Co-Director, RAND Drug Policy Research Center): If youre close to the Canadian border and can get, you know, Canadian bud thats higher quality than ditch weed from Mexico.

KESTENBAUM: Rosalie Liccardo Pacula is co-director of RANDs Drug Policy Research Center. She says some of the differences in price are just differences in quality.

Ms. PACULA: Its just like wine. Theres really, really good wine and theres mediocre wine.

KESTENBAUM: According to that report, hydroponically grown weed in New York can go for $1,000 an ounce. The marijuana market is a real challenge for economists to understand. Its not a black market anymore, and its not quite an open market either.

Ms. PACULA: Yeah, we call it a gray market.

(Soundbite of laughter)

KESTENBAUM: Over a dozen states now allow marijuana for medical purposes. But federal laws still ban it. And strange things can happen when a commodity crosses that border from illegal to legal.

For instance, when states began passing medical marijuana laws, Pacula assumed the price for pot would drop because now if youre growing the stuff, you didnt have to worry so much about being busted, you wouldnt need lawyers, guns, cars with secret compartments for smuggling. But this question has been studied and it looks like the opposite happened. The price of marijuana actually went up.

Pacula thinks the big reason is that when pot became legal for medical purposes, more people started using it. Increased demand, more people wanting something, tends to push prices up.

Kevin Johnson is the general manager of a medical marijuana dispensary in San Francisco called, Grassroots. The place is decorated like a turn-of-the-century saloon. And it does seem like more people are using marijuana these days to treat all kinds of things like insomnia.

Mr. KEVIN JOHNSON (General Manager, Grassroots): Insomnia, I recommend something heavier. Any of the purple varietals tend to work very well for that, something like Purple Urkle or Granddaddy Purple or a Purple Kush. Those tend to be much dopier and sleepier.

KESTENBAUM: Now, in a normal economic market, when demand goes up, suppliers -in this case pot growers - would just grow more Purple Kush, and prices would come back down. But Johnson says the marijuana market is still quirky. Before running the marijuana club, he used to run a bar, which he says was completely different.

Mr. JOHNSON: When you, you know, make an order for your suppliers, for you booze, you know, its going to be delivered on time and you can get whatever Budweiser or Jameson that you need for that week. Whereas in this industry, youd never know when people are going to harvest, sometimes theyll just disappear. You dont know if they just gave up growing or they went on vacation.

KESTENBAUM: If marijuana were completely legal, big corporations might start growing pot super efficiently. And people think the price could come down by at least half. After all, pot is just a plant not that different from growing tomatoes. And price is important because the cheaper pot is, the more people will use it.

And whenever you think about more people smoking pot, that could mean more potential revenue from the tax. California has estimated that the tax could bring in $1.4 billion in revenue a year, though some economists think that number is high.

A few weeks ago, supporters have legalization and taxation in California turned in enough signatures to put the question on the state ballot in November.

David Kestenbaum, NPR News.

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