Some reports speculate illegal operations outnumber legal businesses 3-to-1. ¹Some of this market operates as it always has, and some of it is running a legal business but technically remains illegal (i.e., an illicit online dispensary).

Regardless of circumstance, the state’s cannabis regulators are seeking to crack down on these operations. Total the opposite of what the state government wanted. But how did things get here, and how can it fully transition to a legal market.

OverregulationLet’s start with one of the biggest problems in California’s legal cannabis market: overregulation.Whether you’re a business owner, a farmer, or a lab facility, chances are you have to pay high fines just to be in this industry.When the state initially legalized cannabis, they decided to make high licensing fees, which was heavily criticized, most notably because most banks wouldn’t give business loans to the cannabis industry (as it remains illegal on a federal level).

In turn, only those with high capital (or those who had been in the state’s two-decade-old medical cannabis industry) were able to get their foot in the door.  People of Color (PoC) were left out and those who have been negatively affected by the War on Drugs.Still, beyond licensing fees, California has a long list of regulations concerning cannabis. Some of the rules make sense, like how packaging must be child-resistant and tamper-evident. However, some of the rules are simply absurd.

For example, the Orange County Register reported that while Imperial County allows state-licensed marijuana dispensaries, its three biggest cities (El Centro, Calexico, and Brawley) have outright banned it. ² Of course, this isn’t something we can pin on California as a state. However, it shows how certain places in California don’t have as easy access to cannabis - allowing drug dealers of those areas to continue prospering

Should Counties and Cities Be Able to Control the Market?At the time of this report, only 1 in 3 California cities (144 out of 482) allowed any cannabis business. Furthermore, only 1 in 5 cities allowed medical dispensaries, with 1 in 7 cities allowing recreational shops.As you can imagine, the demand in California is state-wide. If one city doesn’t have a dispensary, a resident is more likely to turn to the illegal market at their doorstep rather than driving an hour (possibly more) out of their way to garner some legal cannabis.Naturally, the state of California should give counties and cities the right to make their own decisions concerning this market.

If more than half the residents in one California city don’t want cannabis, it only makes sense not to open a shop there. But residents don’t always have a say in these issues – elected representatives determine some things. And as you can imagine, there remains some kind of demand in every county and city in California.Still, state regulations concerning cannabis aren’t California’s most significant issue. One of the biggest reasons marijuana’s black market has continued because cannabis remains illegal on a federal level.

How Federal Prohibition is Affecting CaliforniaOne of California’s most significant issues is the fact that it has more supply than demand. Some reports suggest that the state produces 6 million pounds of cannabis per year, but consumers only use about 2.5 million of that. ³Not only has this made cannabis prices plummet in the state, but it’s also forced many dispensaries to get rid of suitable supplies.While most big cannabis companies don’t worry too much about sales, many smaller farmers are in a tricky position where they can’t get rid of their products. Since they still have bills to pay, many turn to the black market simply to stay afloat.However, the only reason they even have to turn to such a market is that it remains illegal to transport cannabis across state lines - even in neighboring states where cannabis is legalized (such as California and Oregon).

The reason for this is cannabis remains illegal on a federal level.If the federal government stepped into action and took a note from Canada, these issues wouldn’t exist because the surplus of cannabis plants could be shipped across the country - as it already is.Even though marijuana remains illegal in most of the United States, the country as a whole has developed an ever-growing acceptance of its medical and recreational properties. With that, more and more people in illegal states are consuming and, as you can imagine, they need to get their supply from somewhere.

California’s Emerald Triangle is an ideal supplier as many farmers have been growing cannabis for years. Their expertise has allowed them to cultivate crops that are of higher quality (and higher potency) than what you’ll find in some legalized recreational dispensaries out East.Due to this, it comes as no surprise the black market continues, and the current federal regulations are a primary cause for its flourishing.

Beyond Nationwide Legalization, What Else Can Be Done?It’s difficult to foretell whether or not the black market would ever cease, even if cannabis were federally legalized. Even though alcohol prohibition ended a decade ago, illegal sales still make up 25.8% of America’s industry.4While we could write a novel about all the reasons as to why the black market will continue, here are just a few reasons:

• Climate Change - While this may seem odd, many small farmers in California are plagued with forest fires and droughts. In turn, they’re struggling to make ends meet and may turn to the black market to garner some extra income.

• High Taxes – Cannabis in California is taxed at 15%, more than double their 7.25% sales tax. Why would you spend the extra money when illicit cannabis is more affordable and legal to possess?

• Potency Limits - Some states are rallying to cap on tetrahydrocannabinol (THC) levels found in cannabis products, with the main argument being public safety.6The problem with this is consumers will likely just continue to indulge in as much cannabis as they need to receive the effects they desire. Or, to save money, they’ll turn to the black market for higher-potency products.

• Product Limitations - There is a chance that illicit cannabis may be higher-quality than what you find in the dispensary. Of course, this all depends on your location and the type of product you choose.

• Legalization of Other Drugs – No one talks about the black market also carrying other illicit substances. While the idea of legalizing all drugs is improbable, one could see how it would help diminish the black market’s size.

With all this said, it’s doubtful we will get rid of the black market entirely. As long as there’s a demand, illicit marijuana sales will continue. And as we’ve seen in California, that demand has reason to remain.

Still, it remains possible to diminish illegal cannabis sales. But to do so, it’s imperative first to legitimize this industry as much as comparable markets, such as tobacco and alcohol.

Source References: 

1 NBC News: California’s cannabis black market has eclipsed its legal one: https://www.nbcnews.com/news/us-news/california-s-cannabis-black-market-has-eclipsed-its-legal-one-n1053856

2 The Orange County Register: Marijuana laws for every city and county? Our database shows California slow to accept Prop. 64: https://www.ocregister.com/2018/04/09/database-of-marijuana-rules-from-every-city-and-county-in-california-shows-slow-acceptance-of-prop-64/

3 SilliconValley.com: ‘Times are really, really tough’: Plummeting cannabis prices strain small Northern California farmers: https://www.siliconvalley.com/2021/08/23/cannabis-farmers-barely-breaking-even-as-price-per-pound-plummets-2/

4 Euromonitor International: Size and Shape of the Global Illicit Alcohol Market: https://www.tracit.org/uploads/1/0/2/2/102238034/illicit_alcohol__-_white_paper.pdf5 NBC News: Drought, wildfires create new challenges for California cannabis growers: https://www.nbcnews.com/news/us-news/drought-wildfires-create-new-challenges-california-cannabis-growers-n1277753

6 POLITICO: The cannabis industry’s next war: How strong should its weed be? https://www.politico.com/news/2021/04/29/cannabis-industry-next-war-485044