There is much discussion in the press about several states moving to legalizing

Question

There is much discussion in the press about several states moving to legalizing marijuana, either for only medical purposes, or more extremely, for recreational purposes. Looking only at the economic impact (not moral implications) of such changes in the laws, discuss how the existing system of supply and demand for illegal marijuana will be changed with the new legalization. What will happen to existing supply avenues? Will legalization significantly change demand? How? Would one expect prices to change significantly? How? What would be the costs and benefits to governments, both in changes in enforcement requirements and in potential tax revenue?

Explanation / Answer

If the ban on marijuana is lifted then there surely will be a short term increase in demand for the drug. The elimination of a risk of penalization and increased availability would combine with social excitement to create a rise in the short-term demand of the drug. The long-term demand is much more difficult to predict.  it is important to realize that marijuana, despite its criminalization, is widely used by a large portion of the American population.

Unlike alcohol and tobacco, marijuana users are disproportionately younger males, suggesting that the use of the drug reflects a youthful experimentation pattern rather than a long-term life pattern of consistent use (Harrison 2007). There are two main ways in which criminalizing marijuana could decrease consumption. The first being that its illegality increases price and consequently reduces demand. The second way in which prohibition can decrease consumption is by fear of penalty for the consumer. Regardless of which of these theories is the driving force, determining how effective prohibition is on reducing consumption will provide a good idea of how use will adjust if marijuana is decriminalized.

Price changes - Marijuana legalization offers an important advantage over prohibition in that it allows for taxation on legal distribution of marijuana. Without taxation, the free market price of cannabis is estimated to be extremely low. Therefore, taxation could be implemented at extremely high rates, while maintaining the price of the drug at a rate competitive to other intoxicants, such as alcohol. Taxation on legalized marijuana would both create government revenue as well as provide a less harmful and addictive substitute to tobacco and alcohol.

Costs& benefits to government - Legalizing instead of decriminalizing marijuana is the more effective method to create government revenue by taxation. An idea is to regulate consumers directly by requiring licensing for all who intend to buy, consume, or grow marijuana. By charging fees for these licenses, government could generate revenue. These user fees can be costly to administer since they must be distributed to a very wide population. This would also still require difficult enforcement efforts to the unlicensed as sharing from those with licenses would be very easy.

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