Blunt Realities of Weed Economics: The National Patchwork of Legalization

Key Points

• Under US federal law, weed, also known as “marijuana” or “cannabis,” remains a Schedule I illegal narcotic, in the same category as cocaine and heroin. Production and sale of weed are federal felonies punishable by severe prison terms.
• Individual US states, in conflict with federal law, began legalizing medical weed in 1996. However, in the past decade, the US Department of Justice has agreed not to enforce federal criminal weed laws against anyone who is following state laws.
• As of 2022, 33 percent of all Americans live in states with legal recreational sales of weed, 41 percent live in states with medical legalization but no legal recreational sale, and 26 percent live in states with total weed prohibitions.
• In its early years, legally produced and sold weed has struggled to capture market share. In most places where the sale and use of weed are now legal, illegal weed—unlicensed, unregulated, and untaxed—still has a dominant market share and shows no signs of fading away.

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The legal weed industry is a conundrum. By some measures, the industry is growing rapidly: 38 states (plus Washington, DC, and Puerto Rico) have legalized weed in some way. In the past five years, the number of US states in which recreational weed sales are legal (available to anyone age 21 or over, including visitors) has doubled.

Nevertheless, over that period, many legal weed businesses have struggled to survive financially. This is mainly because the legal industry faces stiff competition from a thriving illegal weed industry, which offers similar products at much lower prices. Stock values for publicly traded cannabis companies and the value of cannabis index funds have declined. As a result, many investors complain of having lost fortunes in the industry.

In this report, we examine the origins and growth pattern of the legal cannabis industry in the United States, how we got here, and what we can learn from data about differences in the organization of states’ legal weed markets. A companion report, titled “Federal Weed Legalization: Less Is More,” outlines federal policy options and their likely impacts.¹

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Notes

1. Daniel A. Sumner and Robin S. Goldstein, “Federal Weed Legalization: Less Is More,” American Enterprise Institute, August 4, 2022, https://www.aei.org/research-products/report/federal-weed-legalization-less-is-more.