Nova workboard

a blog from young economists at Nova SBE

Should marijuana be legalized? – A glance at the Economic Effects in US

 Marijuana is the most commonly illicit drug used in America. According to the National Institute of Drug Abuse (NIDA), Marijuana usage has increased since 2007. In 2012, there were 18.9 million current users—about 7.3 percent of people aged 12 or older—up to 14.4 million (5.8 percent) in 2007.

 High demands likely indicate that legalization of this drug would have a colossal consequence in the economy. This would mostly affect: employment; marijuana demand; tax system and rates; the prospective government revenue; and social concerns such as rehabilitation programs.

 In order to understand the widespread impact, prevalence, and price of marijuana if decriminalized, we must primarily estimate how demand would be effected.

 If legalized, there would undoubtedly be a short-term increase in the product demand. Illicitness is currently a major restrictive for its usage as penalties for possession of marijuana can be very severe.The risk of penalization and increased availability combined with social excitement might justify the short-term rise for marijuana demand. The long-term demand is much more difficult to predict.Many tend to disagree on this topic discussion: according to Pacula (2001), marijuana use was found to be extremely inelastic. The elasticity of demand respecting the price was -0.06. Thus, a 1% increase in price would result in only a 0.06% drop in demand. DeSimone and Farrelly (2003) found analogous results, “Adult marijuana demand was not related to its own price”.Plus, they discovered price to be irrelevant for the more commonly users. Nonetheless, Harvard Professor Jeffrey A. Miron claimed in his report “The Budgetary Implications of Marijuana Prohibition” that the amount demanded of marijuana after legalization would mainly be determined by price.

 Legalization provides an enormous advantage over prohibition allowing taxation on legal distribution of the product. Without it, 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 at a rate competitive to other intoxicants, such as alcohol. This action of legalizing, would both create government revenue as well as provide a less harmful and addictive substitute to tobacco and alcohol.

 Comparing the costs of tobacco with the cost of marijuana is useful when analyzing the natural price but not necessarily the market price. The two drugs have very different effects of the user. A joint of marijuana is highly more intoxicating than one tobacco cigarette. So, comparing production rates is a good determinant of what the free-market price would be, not the competitive rate at which it should be sold.

 There are several different ways to implement a tax on marijuana. One method would be to tax cultivators; other, to regulate consumers directly by requiring licensing for all who intend to buy, consume, or grow marijuana.

Social costs of Marijuana

External Costs of Drug Use

Cigarettes(pack of 20) Alcohol (1 excess oz) Marijuana (1 joint)
Net health costs $0,15 smoking diseases

$0,23 passive smoking

$0,26 $0,02 smoking
Accidents $0,93 $0,60
Total $0,38 $1,19 $0,62

Source: Manning et al., “The Taxes of Sin: Do Smokers and Drinkers Pay Their Way?,” JAMA 261:1604-9.

 We can conclude that the total social cost of marijuana is $0.62 per joint. Manning would argue that the above formulas should decide the rate of an implemented “harmfulness tax”. However, as previously argued, taxes should be largely enough to upturn the price of marijuana to the competitive rate.It is critical to be aware of the determined social cost of $.62 per joint when analyzing whether or not legalization would benefit society as a whole.

 Marijuana legalization is not a magical solution to the current drug problem faced in America today; nor is it the complete solution to the economic and budgetary problem. Yet, it could drastically reduce the annual deficit in government budget by nearly $26 billion.

As a time of Economic Recession such legislation should be seriously considered.

#696

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.