What really happens when a state lowers the cost of growing legal cannabis?
To find out, Hsuan-Wei “Wayne” Lee, assistant professor, department of biostatistics and health data science at Lehigh University’s College of Health, is partnering with University of California, Berkeley’s Cannabis Research Center to investigate the impact to the market when California eliminated the cannabis cultivation tax placed on growers in 2022. This extra cost had previously pushed cannabis prices above those on the black market.
Lee is a public health researcher with a passion for addressing interdisciplinary health and social science challenges through the application of mathematical modeling and statistical principles. He brings expertise in social networks, computational social science, mathematical epidemiology, health data science and evolutionary game theory. While this was his first study of the cannabis industry, he has extensive experience studying addictive behavior, substance usage and vaccination.
California is one of the nation’s most accepting states for the cannabis industry. The tax elimination provided an opportunity for a “natural experiment,” in which researchers take advantage of a real-world change or event to examine its effects. In this case, they drew on statewide industry data from January 2020, the earliest date that a comprehensive set of cannabis industry data was available, through September 2023. This timeframe represents roughly 30 months before the tax elimination and 15 months after.
The natural experiment design treated California's statewide tax elimination in July 2022 as a policy shock. Lee applied difference-in-differences models across three geographic levels: individual stores, cities, and counties. This approach allowed him to compare outcomes before and after the policy change while controlling for seasonal patterns, local economic conditions and market characteristics. From a public health perspective, understanding these market dynamics is crucial because legal market expansion enables better regulatory oversight. Legal retailers must comply with product testing, potency labeling, and age verification requirements that protect consumer safety.
A key technical finding involved demand elasticity, which measures how sensitive consumers are to price changes. This elasticity remained stable at approximately 1.3 throughout the study period. At the same time, when new stores entered the market, they barely affected existing stores' sales. Each new competitor reduced incumbent sales by only 0.1%, a statistically insignificant amount. These two findings together provide strong evidence of successful demand formalization. Consumers were switching from unregulated illegal sources to licensed retailers rather than just moving between legal stores.
This shift has important public health benefits because it brings previously hidden transactions into a regulated system where product quality can be monitored and health risks reduced. The analysis also revealed significant geographic differences. Counties where more residents could access legal cultivation saw larger sales increases. However, when both cultivation and retail access were already high in developed markets, the policy hit diminishing returns due to market saturation. These spatial patterns matter for public health equity because they show that underserved rural areas benefited most from the tax relief, though they still face structural barriers requiring additional policy support.
After analyzing data that encompassed more than 1,500 licensed retailers across 42 California counties, he found that market expansion remained steady before and after the cultivation tax elimination. Retail sales increased by about 10% at the city level, even as prices fell slightly by about 1.7%.
Lee discovered noticeable market consolidation, along with a stark geographic divide for sales growth.
“People are buying more cannabis, and the total sales are increasing,” he said. “The increase happened faster or earlier for the metropolitan areas than in the rural areas. When the elimination of the cultivation tax happened in 2022, the metropolitan counties were already saturated, so the growth was not that fast, but for the rural areas, the growth was still very fast.”
Surprisingly, cultivation activity actually declined after the tax was removed, even though the number of manufacturers and distributors increased.
“It is counterintuitive,” he said. “Taxation is not the only factor that can affect the number of cultivation entities,” adding that competition, vertical or horizontal integration and the illicit market can all play a role.
Lee sees potential to apply the study’s findings to other emerging industries that are navigating legalization, such as gambling or psychedelic therapy. He is currently preparing a manuscript on the study along with partners at U.C. Berkeley, and plans to further study the vertical and horizontal integration of the market, using California as an example.
This broad project draws upon his background in developing mathematical models for public health. Through his research on the policy changes to the California cannabis market, as well as his other projects, Lee’s work reflects the College of Health’s commitment to applying innovative technologies to study real-world issues that affect population health. His work not only advances scholarship but provides insights that can guide policymakers and promote healthier communities.
