High Times: The Economics of Marijuana

14 05 2011

Historically, marijuana has been dated back to China around 2737 BC. In later years, it has been tracked in the cultural scriptures of almost all cultures. It gained worldwide popularity as not only a recreational drug, but as a utility that could be made into other useful products such as fabrics, papers, ropes, jewelery among other things. In Canada, marijuana was first banned in 1923 under the Opium and Drug Act. Nowadays, it is still criminalized, but the many courts declare it to be “of no force and affect”. There has been an ongoing debate since then as to why it should be legalized once more and in this entry, I plan to outline the economics of the plant as both a recreation drug as well as it’s other uses, where it can go in the future as well allowing you to take a ride on my train of thought.

This debate over the legalization shares a great number of similarities to the the Canadian Alcohol Prohibition of 1918. With the criminalization of alcohol, booze simply became underground, bootlegged and opened up thousands of black markets, leading to the rise of crime in both the smuggling as well as the illegal production. This led to the eventual disbanding of all alcohol-related prohibition laws. I believe, that by utilizing the same concepts we have learned from 1918, legalizing, taxing and regulating marijuana will allow for benefits both economic and social.

Seeing Green

The legalization of marijuana would provide many positive externalities to society.

Marijuana has a huge following around the world, in spite of it’s illegality. In 2004, the most recent year cited, it was estimated that “16.8% of Canadians aged 15 to 64 smoked marijuana or used other cannabis products”, four times the the global rate. Although due to it’s secretive nature, it is hard to estimate the monetary value of marijuana in Canada, many economists and agencies believe that it is in the range of around $20 Billion per year, making it Canada’s single largest agricultural product. By legalizing and using excise taxes (or “sin” taxes) on marijuana, similarly to the tax on cigarettes and alcohol, the government can make use of the industry and gain profits to be reallocated to other places, which is a huge positive externality within itself.

Another positive externality of the legalization of marijuana would be the freedom of our policing and judicial systems. One gripe that many have with the current criminalization of marijuana is that it strains our cities public resources on an issue that shouldn’t be dealt with. Like any other crime, it comes with three main (and costly) aspects; policing, judgment and detainment. When people are caught for marijuana-related crimes, they must first be physically caught by the police. Afterward, they are put through a court system and finally, if found guilty, they are then detained for the sentence deemed by the judge. This may seem regular, but in the grand scheme of things, marijuana-related crimes make up around 3% of all crimes in Canada (excluding traffic). Though this seems like a small number, this would mean that 3 in every 100 court cases would not need to happen, affecting the system greatly in the long run. The entire three-prong system itself is extremely costly to the government and with that small chunk of crimes need not worried about, it is evident that we should see a smoother system overall.

Thirdly, the legalization of marijuana would almost destroy the underground black market of marijuana and thus the criminals behind it. With marijuana able to be sold more freely, those who currently sell it will have less market power due to the number of sellers in the marketplace. With the huge number of sellers in the market, there will be no use in violent crimes over turf or selling grounds that is commonly associated with illegal drug rings.

Combating the Negative

Many people argue that with the legalization of marijuana, many negative externalities will arise. One main concern with marijuana is the second hand smoke it provides. Although this is a very valid point, there has yet to be any research showing the co-relation between long-term marijuana  usage (as well as the smoke it produces) and health risks.

The quality of the evidence suggesting a link between long-term use of marijuana and cancer is neither as strong nor as comprehensive as the evidence regarding tobacco and cancer. A number of studies have reported an increase in head, neck, lung and throat cancers. To date, no epidemiological studies have consistently confirmed an association between long-term marijuana use and cancer risk because there is no standard amount of THC (the main active ingredient in marijuana) in every marijuana cigarette.

– Canadian Cancer Society
Another potentially hazardous externality that is often discussed is the “gateway” aspect of marijuana. Many believe that though not as harmful, marijuana actually coaxes the users into trying more addictive and dangerous drugs (ex. cocaine, heroin, etc). Many also go on to argue that the legalization of marijuana will lead the government to legalize the more dangerous drugs aforementioned. This gateway theory has yet to be proven yet and produces inconclusive evidence of the co-relation between the two. As for the legalization of more dangerous drugs? Fallacious. It would be a stretch the say that because of the legalization of marijuana would lead to the legalization and leniency towards more harmful drugs.

Most people who experiment with marijuana do not go on to use harder drugs.

Still, “the vast majority of people who we see who do cocaine or heroin have done marijuana in the past, or are likely to do it at some time in the future.” But “if we could push a button and all the marijuana would go away, by no means will that stop the drug problem in this country.”

– Dr. Neil Capretto, Medical Director, Gateway
So what do we do now?

From a supply and demand standpoint, I believe that marijuana can be graphed like so. The supply is inelastic as it is tough to increase production as a result of an increase of demand. Demand is inelastic because it is tough to find a drug with the same effects without the same low levels of addictiveness and the consumer does not spend a large amount of their income on the good. With the criminalization of marijuana, we decrease it’s supply (higher price, lower quantity) and decrease it’s demand because of the illegality of possession (lower quantity, lower price). I propose that the strongest way to go about really utilizing marijuana’s economic power is by legalizing and regulating it the same way we do with cigarettes. Because of the relatively inelastic nature of the good, a heightening in price, no matter how large won’t have as much affect on the quantity consumed and thus is easy to tax.

The boil-down

Overall, I feel marijuana does more help than harm for our society. The legalization and taxation of it would bring us some economic gains similar to the money we make by taxing 28 billion dollar cigarette industry. Not only that, it would free up our judicial system and policing systems and allow them to focus on more important issues. Finally, it would also reduce drug related violence that is often based off of the underground nature of the industry. Marijuana will be used whether we legalize it or not, the only real question is if we’ll harness it’s potential, or let it go to waste.

“That is not a drug. It’s a leaf” – Arnold Schwarzenegger

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3 responses

16 06 2011
Christopher Lee: Posting Summary (categorized this time) « The Blog for WLMac Economics

[…] Journal 7- High Times: The Economics of Marijuana […]

17 06 2011
Noah Schafer

Chris, as with all of your posts your argument for the legalization of marijuana in Canada is both informative, and convincing. It is one thing to simply state the economic gains this would have on our society (and there sure seems to be a lot), but than being able to counter the negative externalities it would have on the economy leads me as a reader to lean strongly towards your side. Countless studies have been done in trying to determine the negative effects of marijuana with nothing convincing being reported. The worst of the plant as you mentioned in your post seem to be things that can easily be eliminated if it were to become legalized. For example, some say that it leads to harder drugs, and maybe that is true if you are buying your bud from a dealer who is only interested in making money. However, if you buy your bud from a trusted source there is nobody peddling harder drugs too you making it far less likely that marijuana users would move on to harder drugs. Other arguments such as the effect it has on your body have also not been proven, as you mentioned in your quote from the Canadian Cancer Society. Finally the problem with it being laced with harder drugs would also be eliminated if marijuana was to become legalized as legal dispensaries would not be lacing their weed.
One point I would like to bring up is the black market side of marijuana. While it is true if marijuana is legalized many drug dealers will be taken off the streets, it will not completely solve the problem. Marijuana is incredibly easy to grow and cultivate compared to making underground cigarettes and booze. In many places such as in California where medical marijuana is legal prices can reach about $20 a gram, which is twice as much as what marijuana generally goes for in the underground market. I believe that while a lot of the problem will be solved, there will still be a lot of people that will be able to make a profit by selling their own marijuana, therefore maintaining a black market.
Aside from that minor point to think about I really enjoyed reading your post and I hope that the government recognizes all the positive points you raised and takes action.

17 06 2011
Noah Schafer – ISP « The Blog for WLMac Economics

[…] Comment 4 […]

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