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marijuana growing business is not the market return,
R*, but a return that is risk-adjusted above
those associated with legal investments. As a result,
the cost of funds that this group faces carries
a risk premium relative to that of legal
investments. 27
This suggests an expression like 3 is relevant to
the basic equilibrium:
3. [(1-π)PQ-C]/C=R*+π
which equates the expected return on the
left-hand-side to a higher-than-legal-market return
by an amount of the risk, π. Although the risk
may not simply be additive, Appendix B derives
a form that is consistent with 3.
Calculating the number
of grow-ops
How does all this help with a calculation of the
number of grow-ops in British Columbia?
We need to assume something about π. Weassume
that it is the risk of being busted by the police.
28 If we assume that only the police bust
grow-ops, then we can develop a measure of the
total number of grow-ops in the province.
PUBLIC POLICY SOURCES, NUMBER 74
To see this, recall what we “know” in this context:
29
• We know the price of the product (see appendix
B)
• We know the quantity of product for each operation—or
at least we know the average output
of those that are busted.
• We know the cost of the operation, although
there are a few nagging issues that make this a
more speculative calculation than the other
data.
• We know the market return on legal enterprises—although
this can be argued, the
range of variation is likely not to matter much
as will become apparent in the calculation.
• Finally, we also have a measure of the number
of operations that have been busted around
the province. 30
These data are sufficient to calculate the number
of grow-ops. To see this, first consider the variable,
π. Since π is the probability of being busted,
we can think of π as being the ratio of busts relative
to the total, T, the (unknown) number of
grow-ops:
4. π=B/T
27 Note that this is not the same as another experiment: should a person participate in the legal or illegal market? In this case,
clearly the decision is based on R*.
28 It also should include any other risk associated with being illegal rather than legal, e.g., lack of resources for redress of theft,
extras security, and the like. Underestimating the risk will underestimate the number of grow-ops.
29 In this context, “know” is speculative under the best of circumstances.
Appendix BCUC IR1 74.1
30 This, of course, is police busts. It should also include “busts,” or thefts, or any other event that reduces the ability to sell the final
product on the left-hand side of the equation. As discussed earlier, some reports have marijuana “rips” at one a day in
the Vancouver area alone. Consequently, these calculations that use only police data to estimate the number of marijuana
grow operations are very conservative.
Marijuana Growth in British Columbia 14 The Fraser Institute