Alchian and Allen Revisited: Law Enforcement and the Price of Weed

Alchian and Allen (1964) theorized that the imposition of a fixed fee or a unit cost in a market with multiple quality grades of the good would encourage consumption of the higher quality grades. Using newly available data on marijuana prices by state, we empirically test the hypothesis that the price of higher quality marijuana will be higher in states with more strict enforcement of marijuana possession laws. Consistent with the Alchian-Allen theorem, the relative price of both medium- and high-quality marijuana are found to be greater in states with stricter law enforcement, suggesting an increase in demand for such varieties.