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.”