Risks and Prices: The Role of User Sanctions in Marijuana Markets

Abstract User sanctions influence the legal risk for consumers who engage in illegal drug markets. If a reduction in user sanctions leads to an increase in consumption, drug prices will rise unless supply is perfectly elastic. In equilibrium, a change in consumption associated with decreasing user sanctions could be relatively small if supply is upward sloping. Using a novel dataset with rich transaction-level information, this paper evaluates the impact of recent changes in user sanctions for marijuana on marijuana prices. The results suggest that lower legal risks for users are associated with higher marijuana prices in the short-run, which ceteris paribus, implies an upward sloping supply curve, higher consumption, and higher profits for drug dealers. The findings have important implications for the current policy debates regarding decriminalization of marijuana.