This chapter deals with three fascinating themes related to the pricing of marijuana:

• The geography of marijuana prices. We identify substantial regional differences in marijuana prices within Australia, use the cost of marijuana to conveniently divide the country into three regions, and propose reasons to explain why the price differences are not arbitraged away.

• The economics of technical change. Over the last decade the production of marijuana has experienced a “hydroponic revolution”, whereby the crop is now predominantly grown indoors under tightly controlled conditions. We show that at the same time marijuana prices have fallen by much more than most other commodity prices. We argue that these two developments are not unrelated, as it seems likely that a large part of the benefits of this productivity improvement has been captured by consumers in the form of lower marijuana prices. However, we also recognise that part of the price decline could possibly be attributable to more tolerant community attitudes, softer laws and reduced penalties for drug offences.

• Packaging economics. Large price discounts are available for bulk purchases of marijuana. For example, the unit cost of marijuana purchased in the form of an ounce package is as much as 50 per cent lower than that purchased in a gram package. Using new methods, we apply the economic theory of packaging to understand the existence of these quantity discounts and show that marijuana seems to be subject to pricing principles that are similar to those observed for legal products such as groceries, as well as some other illicit drugs.

These themes are of considerable interest because they illustrate the workings of economic principles in an unusual setting.