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

don't know if either of this is correct. But for analysis, we just want to see, "Well,

how would the results change?" You know, depending on ones assumption about the shape of the

demand curve. And the take-away from this chart is that it matters a lot. Your assumptions

about the demand curve are really going to influence your projections about consumption.

On the y-axis here we have the percent increase in consumption post-legalization and on the

x-axis we actually have the percent of consumption that evade sales taxes, because we actually

don't know how much tax evasion is going to be happened. But just focus here at the, you

know, at the y-axis. Assuming that--assuming a linear demand curve, a $50 an ounce tax,

no tax evasion, a perfectly elastic supply curve, we would expect that post-legalization,

the price or the consumption would increase about 76%. Now, keep all of that constant

and just switch out the linear demand curve for the constant elasticity demand curve and

that goes to about 150%. Now, once again, I want to be very clear, we don't know if

either of these is correct, but this assumption actually makes a big difference. And oftentimes,

when individuals are doing these analysis, they just kind of make an assumption and don't