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  • DEFAY: Hello and welcome everybody. My name is Chris DeFay. A member of the Authors@Google

  • team here in Santa Monica. Today, I'm pleased to introduce as part of our Tech Talk series,

  • Beau Kilmer. Our guest is a co-director of the RAND Corporation's Drug Policy Research

  • Center, which I just learned is over 20 years established, which is great. His primary field

  • of interests are elicit markets, community corrections, drug treatments, and he used

  • advanced technologies to help monitor drug and alcohol use among problem populations.

  • Kilmer's current work includes projects to estimate the economic cost of drug use and

  • the evaluations of community level effects of drug treatment. Dr. Kilmer joins us today

  • to discuss the policy implications of marijuana legalization in California nationally and

  • internationally. There's been a dramatic shift in drug policy in recent years. Ballot initiatives

  • have been proposed at the state level and--excuse me--and municipalities are today grappling

  • with how to regulate marijuana dispensaries and enforce existing drug law. Please join

  • me in welcoming Dr. Kilmer in discussing this fascinating topic.

  • >> KILMER: Thank you, Chris. And thanks to all of you for being here. So firstly, my

  • name is Beau Kilmer. I'm the Co-Director of the RAND Drug Policy Research Center. For

  • more than 20 years, we've been doing work on a variety of issues related to substance

  • use and drug policy. If some researchers are developing innovative prevention programs,

  • others doing evaluations and assessments of racial disparities and marijuana arrests,

  • if some folks are doing kind of high level statistical analysis of data from undercover

  • drug busts, and with all of these projects, the goal is to provide objective research

  • and analysis to decision makers. And so lately I've been working on a project looking at

  • marijuana legalization in California and that this is definitely a team project and I got

  • to be a part of a great team. I got to work with Jon Caulkins at Carnegie Mellon University,

  • Rosalie Pacula, who's the other Co-Director of the RAND Drug and Policy Research Center.

  • I got to work with Robert MacCoun at UC Berkeley and Peter Reuter at the University of Maryland.

  • And in addition, we actually had a number of students from Carnegie Mellon University

  • actually doing a lot of the background research and we wouldn't have been able to do this

  • without them, so thanks. So, as you know, marijuana legalization is a hot topic in California.

  • And most of the focus right now is on two different proposals. The first proposal is

  • Assembly Bill 2254, often referred to as the Ammiano Bill. And what this bill would do

  • is it will legalize marijuana for those who are 21 and older and it would put the California

  • Department of Alcoholic Beverage Control in charge of regulating the production and distribution

  • of marijuana and initially they will place a $50 an ounce excise tax on marijuana. Last

  • year, the California Board of Equalization did an analysis and said that at $50 an ounce

  • this would bring in $1.4 billion in tax revenue to California each year. The other proposal

  • being considered is the Regulate, Control and Tax Cannabis Proposition. This is what's

  • going to be on the ballot on at November 2010. This initiative would also legalize marijuana

  • for those over--those 21 and older and it would also make it legal to cultivate your

  • own 5x5 plot in your home. The interesting twist here is instead of having statewide

  • regulation, it would allow each local jurisdiction to have the power to regulate production and

  • come up with their own tax rates. And--but--and just to kind of put this in perspective, I

  • mean what these proposals really are kind of revolutionary. And no other place in the

  • world have we legalized the production and distribution of marijuana. You know, a lot

  • of people like to think, "Well, you know, and that, you know, when you go to Amsterdam

  • it's legal and." No. Well, it's legal to go to a coffee shop in the Netherlands and buy

  • five grams it's still illegal to produce it. So it's kind of it's legal in the front door,

  • illegal in the backdoor. So, I mean, to the extent that this hasn't happened in other

  • places, I mean, it's really unclear about trying to project what would happen. You know,

  • there's a lot of, you know, a lot of debate and there's actually a lot of rhetoric in

  • this debate. So, the goal of our analysis really was to just focus on two issues; one,

  • try to understand how legalization of marijuana in California could influence consumption

  • and then also look at how legalization could influence public budgets. And I want to make

  • it very clear that the--we did not--we neither had time nor the resources to do a comprehensive

  • cost-benefit analysis. I mean, our goal wasn't to, you know, come out and say, you know,

  • "This would be a good idea for California or this would be a bad idea for California."

  • Similarly, I mean, we're not trying to tell people how to vote on the initiative. You

  • know, RAND doesn't take positions on ballot initiatives or a specific, you know, specific

  • bills being considered. I mean, we really don't have a horse in this race. We just wanted

  • to kind of provide some objective information to actually help guide the discussion we'll

  • be having for the next five months here in California. And I'm sure we'll continue to

  • have this debate and discussion after November. So, today I want to briefly just talk about

  • how we built this model and then go into some of the key insights. So, you know, we begin

  • with this logic model where you can see on the left-hand side you've got your choice

  • variables. You know, when you legalize you make a choice to remove the sanctions for

  • possession and sales, then you also have to make decisions about the regulatory regime,

  • the tax rates. On the right-hand side, you have these octagons, are kind of the outcomes

  • that we cared about, you know, marijuana consumption and also the net impact on state and local

  • budgets. And as you can imagine, I mean, these policy decisions have direct and indirect

  • effects. And I'm not going to walk you through each of these different boxes and arrows during

  • the presentation but I want to make it very clear that we were systematic about this.

  • And so, for each of these intermediary boxes, we actually not only had to come up with a

  • point estimate but we also had to kind of come up with a range. And so, when we could,

  • you know, we looked at the peer review literature for a lot of these boxes. There wasn't a lot

  • there in the scientific literature. I went to the gray literature, I went to greenhouses,

  • talked to farmers, talked to people at medical marijuana dispensaries and we did a lot of

  • different things in order to kind of come up with these ranges. And I mean, while this

  • is useful in terms of kind of making projections for the model, just the idea of kind of bringing

  • all that literature together for each of these boxes turned out to yield some of our most

  • important insights. So now let's talk about some of the key insights. And kind of the

  • main takeaway from the analysis is that we expect that the pre-tax retail price of marijuana

  • to drop substantially post-legalization, probably on the order of 80%-90%. Right now if you

  • want to get an ounce of sinsemilla in California, and this is your high quality marijuana, it's

  • going to run you between $300 to $450. I just want to make it clear for the analyses; we

  • actually end up having to convert everything into sinsemilla equivalents because we know

  • that most of California isn't using sinsemilla right now. But in order to get an idea about

  • what happens to the price post-legalization, you actually have to make some assumptions

  • about what would production look like. You know, we just don't know, so we kind of cost

  • it out four different--in four different approaches. One being, you know, we would allow everyone

  • to do their own private hydroponic 5x5 plot. Another mode of production we looked at was

  • allowing residential grow houses, assume it's a $1,500 or 1,500 square foot grow house or

  • 300 square feet, would have be devoted to production. Then you also have greenhouse

  • farms and then unfettered outdoor farms, you know, we costed it out for each of those.

  • But ultimately, we had to make a decision about which one we thought would be most likely

  • in order to do the projections. And we ended up focusing on the grow houses for a few reasons.

  • First of all, if you're a jurisdiction and you're trying to make money off of taxing

  • marijuana, the 5x5 plot that's just inefficient, you're not going to get that much. And with

  • respect to greenhouse farms, your kind of unfettered outdoor farms, you know, we don't

  • know what the Federal Governments' going to do. But we thought that the Federal Government

  • would probably have a problem with all these greenhouses and unfettered farms up and down

  • I-5. You know, I want to make it very clear, we don't know what the Feds are going to do

  • but we thought, so--we felt comfortable basing in our assumptions on this grow house model.

  • And with the grow houses are--in fact, with any of these kind of modes of production,

  • there are a number of reasons why you would expect the cost of production to go down.

  • First of all, you're getting rid of the risk. Right now, when you buy cocaine, when you

  • buy heroine, when you buy marijuana, a lot of what you're paying for is actually to compensate

  • the dealer and everyone else in the supply chain for their, you know, their risk of arrest,

  • their risk of incarceration. That will go away with legalization. You also have to--and

  • there's also going to be a decrease risk of asset forfeiture. You also have to think about

  • automation, too. I mean, right now, when you're trimming buds, that's a very labor intensive

  • process. I mean, they now have machines, which are much more efficient at doing this. And

  • we're going to expect those machines not only to be more available post-legalization but

  • also cheaper. And in fact, people wouldn't necessarily even have to buy them. You could

  • actually just, you'd probably could just rent some of these machines in order to help trim,

  • you know, when it's time to actually manicure. And then finally, also economies of scale.

  • I mean, it's one thing if you have one or two grow houses, but if you're able to actually

  • have 15-16 grow houses then you could start really buying the fertilizer, the nutrients

  • and kind of the other substances in bulk and so one could imagine that there would be savings

  • there. So there's a lot of theory about, well, that we would expect the price to be low,

  • but then we went and just tried to figure it out. Okay, assuming that we have a grow

  • house and knowing how much lighting it would require, how much labor it would require,

  • what would actually cost to produce a pound of sinsemilla? The range we came up with was

  • with--was between $200 and $400 a pound. So, if you're trying to figure out what that retail

  • price would you'd have to add on your wholesaler markups, retailer markups, distribution. When

  • all is said and done, we expect that post-legalization--an ounce of sinsemilla pre-tax would run less

  • than $40. That's a big difference from the $300 to $450 that you see in the market right

  • now. And just to kind of put this in perspective, some others have tried to estimate this and

  • our estimate kind of falls in those ranges. The Board of Equalization and Miron, they

  • both put it at 50%. The head of the--Gieringer here, the head of the California department--California

  • division of the national organization for the reform of marijuana laws testified last

  • year. They now hay at 300--you can begin with $300 an ounce, but post-legalization where

  • it's unregulated, it would only end up being on the order of a few dollars per ounce. So

  • ultimately, we're most comfortable saying that post-legalization, we expect the price

  • to drop at least 80%. Leads us to our next point that, you know, we expect the consumptions

  • are going to increase post-legalization but it's unclear to how much. All right, there

  • are two reasons for this post-legalization. First of all, you have these non-price effects,

  • right? For some people, it's going to change the stigma, they'll be more likely to use.

  • But then you also have to be thinking about advertising and promotion. For those reasons,

  • you would expect the use to take up a little bit. But then obviously, also when you have

  • such a large price drop you would expect there to be price effects. We know that users and

  • potential users are sensitive to the prices of marijuana. But in order to do that, you

  • really have to really have a good idea about how sensitive consumers are to these price

  • changes. And for you economists out there, you have to have a good idea about the price

  • elasticity of demand. The thing is, is what this price drop that you would see in marijuana

  • is going to be large. And it's something we've never seen before. And so, when you're talking

  • about changes that large, it actually requires that you know what the demand curve looks

  • like. I mean, if we're talking about something small the shape of the demand curve does not

  • matter as much. But for this, it actually--it makes a difference about your assumptions.

  • And you know, and the thing is we don't know what the demand curve for marijuana actually

  • looks like. So, for our analysis we focus on two demand curves which are kind of common

  • in the literature which you learn about in Introductory Econ. You know, constant elasticity

  • demand and a linear demand curve. But we want to make very clear that we'd--we're not--we