Buy Low, Sell High

Marijuana Legalization from an Economic Perspective

A year ago, Colorado and Washington became the first states in the Union to legalize recreational marijuana use. They are not alone. Twenty other states currently endorse the use of marijuana for medicinal purposes.

As is the case with any commodity, the consumption or proscription of marijuana carries a host of externalities. The most notorious negative externality of marijuana proscription is the profit that it provides to criminals.

Due to the enormous barriers that exist for a new firm, grower, or dealer to enter the market and negative incentives that accompany such a decision, the marijuana market is incredibly uncompetitive. The rather inelastic demand for cannibus paired with the industry’s low degree of competitiveness results in a diminished output of cannibus at a cost tremendously higher than the cost of production. The enormous difference in the cost of production and price at purchase represents a loss to the consumers in savings, or loss in consumer surplus.

Were this money going to the government as a tax, a cannibus user could at least toke with the satisfaction that his or her purchases were funding education, infrastructure, development, and other public goods. These profits, however, represent an enormous producer surplus that keeps cartels and criminal organizations well-funded. Some untold billions of dollars a year in revenue lines criminals’ pockets, allowing them to purchase weaponry, employ other criminals, and incentivizes them to vie for profits with other cartels, resulting in gang violence.

An additional negative eternality is the cost to society. The Drug Enforcement Agency’s multi-billion dollar annual budget is largely directed at preventing the growth, distribution, and consumption of marijuana. Given that prohibition is largely ineffective at preventing drug growth, distribution and consumption, it is very wasteful to allocate such enormous amounts of taxpayer dollars to combat such activities. Enormous costs are also imposed upon state and federal prisons that are required to incarcerate thousands of individuals convicted of engaging in the production, sale, or purchase of marijuana.

There are potential positive effects of the prohibition of marijuana. Were the drug legalized and made available to those over the age of 18 or 21 years, it would be more readily available and possibly distributed second-hand to children. Additionally, the case can be made that increased availability to adults would result in increased consumption. If millions of working citizens engaged in extensive use this could precipitate diminished worker productivity in many industries, negatively impacting the United States’ economic prospects. Such a potential outcome, however, would require millions of citizens to begin consumption and to partake in cannibus prior to or during work hours. Alcohol consumption could theoretically have the same effects on productivity if consumed with such regularity, however it does not as undoubtedly millions of workers would be laid off were they to engage in such behavior.

By the same token (no pun intended), marijuana’s legalization could create millions of legal jobs and billions of dollars in taxable revenue. Revenue from farming, distribution, and local sales would stimulate federal and local economies in untold ways. Also, since goods such as snack foods and smoking paraphernalia are complementary goods, the increased supply that would accompany a more competitive market would undoubtedly increase the consumption of these complementary goods.

It might also serve as a substitute good to alcohol. A study from the economics department of the University of Colorado has found a strong inverse relationship between the consumption of alcohol and the consumption of marijuana. If one believes that driving under the influence of marijuana results in less impairment than driving under the influence of alcohol, and that the negative health effects of alcohol are more severe than the negative health effects of marijuana, then such an inverse correlation would mean that increase marijuana consumption makes society better off in terms of health and safety.

While the societal impacts of marijuana legalization are less easier to gauge, the economic side effects are more irrefutable. Our national economy could benefit immensely from the income that accompanies marijuana consumption and its complementary goods. If the national government decided to levy a tax upon cannibus use, this could help defray other exorbitant costs in our society.

It is unclear what the fate of marijuana legalization is in the US and it is challenging to quantify its economic and social impacts. In the meantime, it might be a good idea to invest in local businesses that sell cannibus’ complementary goods such as McDonald’s, Doritos, etc. As the old adage goes, “Buy low, Sell high.”

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5 Responses to Buy Low, Sell High

  1. Sara's Space says:

    I really appreciated reading this, and I agree with everything you’re saying. I think it’s an interesting point that you label snacks and a complementary good – I’ve never thought of that before. Also, you should check out this article: It’s basically a list of all the reasons why republicans should support the legalization of marijuana. Also, not sure if you’ve seen the news articles but apparently a recent poll showed for the first time in history a majority of Americans (58%) support the legalization of marijuana. I think this is a topic that is going to reach the forefront in upcoming elections, and I have a strong feeling we’ll see marijuana legalization across the country within a couple decades at most.

  2. odelossantos says:

    I appreciate the (unintended) pun! That being said, I think your post provides strong and convincing arguments for the legalization of marijuana. Addressing the issue from an economic perspective, I think, will prove to be an effective strategy for legalization advocates.

    Additionally, and you touch on the issue in your third paragraph, is the issue of absurd (and inefficient and ineffective) budgets geared toward the War on Drugs. Per the ACLU, Black people are nearly 4 times as likely to be arrested for possession of weed than White people– despite the fact that both groups possess and use marijuana at similar rates. In some counties, Black people are nearly 30 times more likely than White people to be arrested.

    ACLU article:

  3. The economic impact is evident. The government might need to take a Machiavellian stance and reluctantly set aside morality for the sake of the economic benefits. It should be a matter of time before legislators are pushed to the corner by a majority of Americans:

  4. Kiyana says:

    I think the economic argument for marijuana legalization is the strongest and most convincing argument. The fact that government can now regulate the industry and charge a tax on it is great. More importantly, the crime associated with the current sellers of marijuana not only allow a dangerous subculture and network to exist, but also as you state we are wasting so much money to ineffectively fight these people.

  5. aaronmbr says:

    I agree 100% with your argument on whether or not California should legalize marijuana. Being a long standing resident of Southern California, I know that Los Angeles and the surrounding areas have always had problems with the budget, as well as problems with crime and drugs. However, over the years doctors and scientists have proven that marijuana has much more positive benefits than negative. Rather than creating multiple Fast-track freeways, by legalizing marijuana California would see its financial problems go away. Along with this, the amount of citizens that are in jail and that would go to jail would also dramatically decrease. Rather than labeling people as criminals, and filling up the jails, wasting tax payers money, by legalizing marijuana it would decrease the crime rate and allow officers of the law to focus on people who are trafficking the real drugs like cocaine and heroin, which are much more devastating to life, community, and the social aspects of society that we value as citizens. On Buy Low, Sell High.

    -Think Free, Break the Chains

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