In December 2022, the first licensed sellers of marijuana in New York State opened their doors. That might surprise New Yorkers who saw, to their delight or dismay, hundreds of smoke shops begin selling weed out of neighborhood storefronts last year. These unlicensed, “gray-market” operations may strangle the Empire State’s legal marijuana industry in its crib, thwarting politicians’ ambitions of advancing racial equity via drug legalization.

When Governor Andrew Cuomo signed the Marijuana Regulation and Taxation Act in March 2021, New York became the 15th state to legalize the recreational use of cannabis, which remains illegal under federal law. The bill permitted the possession of large amounts of marijuana and derivative products and allowed New Yorkers to smoke in public. It erected a tightly regulated system under which businesses would need to obtain a license from the state’s cannabis-control board before they could sell marijuana. And it included a number of provisions designed to achieve identity-focused objectives, such as installing an equity officer on the board and directing 40 percent of the tax revenue from legal weed sales to “rebuilding communities harmed by the War on Drugs.” Upon the bill’s passage, Crystal D. Peoples-Stokes, the Democratic majority leader in the state assembly, said, “Unlike [that in] any other state in America, this legislation is intentional about equity.”

Entirely foreseeable developments now threaten those plans. Key to achieving them was a provision requiring half of all licenses to go to “social and economic equity applicants,” with special priority given to women, racial minorities, distressed farmers, people convicted of marijuana-related offenses, and relatives of past convicts. But the state waited 19 months to issue licenses, with the initial batch going out this past November. Between the law’s passage and the granting of the first licenses, enterprising bodega and smoke-shop owners had figured out that they could simply sell weed without permission. Stores popped up across New York City. Having denounced the drug laws of yesteryear as racist and draconian, city and state authorities, unwilling to preside over a crackdown on unlicensed businesses, mostly stood by and let them run. They appeared to forget that markets adapt to new circumstances faster than regulators can.

Now the small legal industry—only 150 licenses are initially being issued, out of 900 applicants—faces an extremely unfavorable environment. Within a five-block radius of Astoria’s 30th Avenue subway station, for example, sit at least a half-dozen brick-and-mortar stores and one full-time weed truck. A license-holder hoping to operate there must compete with High Class Convenience, All the Smoke, Qookies, and Dr. Hushrush, all offering edibles, vaporizers, and high-potency marijuana in a number of different strains. As the state’s Office of Cannabis Management has publicly confirmed, none of these gray-market businesses is operating legally. Some proprietors seem aware of this, requiring buyers to make a “suggested donation” in exchange for goods or selling expensive stickers, for which weed is putatively a free bonus, but consumers likely won’t distinguish between licensed stores and unlicensed ones. First-mover stores enjoy good locations and customer loyalty.

Contrary to Peoples-Stokes’s proclamation, New York’s marijuana legalization regime may not turn out to be all that unique. California legalized cannabis six years ago but did not crack down on illegal transactions, either; today, illegal sales in the Golden State far exceed legal ones. Politico recently noted that California has only 2.1 licensed dispensaries per 100,000 people, well behind the rate elsewhere and a sign that the state’s legal industry is essentially moribund.

Part of the problem is that weed sold in legal stores costs more than that peddled by illegal stores, couriers, or dealers. A business that can operate outside the bounds of the law should be able to undercut those that sell an otherwise identical product but have to comply with regulations. “In many states, it is not clear whether the price of legal weed will ever be competitive with the price of illegal weed for most consumers,” observe Robin Goldstein and Daniel Sumner in their 2022 book, Can Legal Weed Win?

This problem has an obvious cause: as Charles Fain Lehman writes in a City Journal review of that book, “nobody is stopping illegal businesses from operating.” And New York authorities seem aware of the dynamic. Mayor Eric Adams initially vowed not to take a “heavy-handed” approach to the issue, but he changed his tune in December, saying, “We can’t allow those who cut the line to undermine the legal market.” A city hall spokeswoman told Politico that “multiple agencies—on both the city and state level—are coordinating closely to ensure compliance and equity in the emerging cannabis market” and touted “hundreds” of inspections that yielded the confiscation of “thousands” of products. Prominent boosters of legalization such as Bradley Tusk have sounded the alarm. And industry groups have begun to attack the unregulated market, with the New York Medical Cannabis Industry Association alleging that unlicensed businesses are selling contaminated or mislabeled products. New license-holders will surely echo such concerns.

But eventually, protecting the legal marijuana market will require a law-enforcement crackdown on the illegal one. Will that prove too hard for politicians who triumphantly declared the end of the war on drugs? Or will the politics of patronage and the interests of a new business lobby win? Ultimately, New York progressives face a dilemma of their own devising: they wanted to create a new industry that would achieve what they see as racial equity—but they fear that protecting the industry will thwart that goal.

Photo: carstenbrandt/iStock


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