Here's an idea: let's legalize marijuana. Is this idea new? Definitely not. As an economist, it isn't unusual for me to say this, but for some reason, legalizing marijuana is controversial among policymakers. Support for legalization is even becoming more mainstream. According to the questionably reputable online source, The Marijuana Policy Project or MPP, currently around 40 percent of Americans support legalizing marijuana. That's no majority, but it is enough of a division in public opinion that it warrants careful thought.
A casual observer may not understand why marijuana is illegal. What's so terrible about marijuana that makes it worse than alcohol? Is it really worse than alcohol? Should marijuana be legalized for medicinal purposes? Is that fair to people without a doctor's note? What would it say to legalize marijuana? Would this condone further use?
From an economic perspective, these questions are not well-posed. Proposing legalization of marijuana necessarily raises ethical issues like those in the previous paragraph. It is precisely these issues that make the topic of legalization such a hot headed debate. Despite what the commentators say, economics is not about fiery arguments; economics is about rational thought. We may not agree on what is ethical, but we should be able to agree on facts and logic.
To avoid a morality impasse, we need some common ground. For the sake of having a reasonable discussion, let's suppose that we don't think that marijuana is intrinsically good. It would be too easy for the pro-pot camp to claim that marijuana is a good thing because it is, well, good. In all fairness, marijuana likely doesn't cure all ills, and I suspect it is illegal for a reason. In fact, for the sake of argument, I'll take this supposition one more step. Let's just presume marijuana is a nasty substance that we want out of people's lungs or brownies. Given the setup, the economics of drug legalization depends on the following questions:
Can legalization plus taxation equal less use? The law of demand applies to illegal commodities, as well as legal ones: a higher price means less use. Current users of marijuana are willing to break the law to obtain the drug. The time spent finding suppliers (they're not exactly in the Yellow Pages) and avoiding getting caught is part of the price current users pay for the drug. In a world where marijuana is legal, this component of the price would go away.
Plus, according to "A Piper" in the comments on this MPP Video, "The cannabis [he/she] last purchased cost [him/her] $350/ounce." That's expensive! Reading the comments of users, the overwhelming sense is that the monetary cost would go down with legalization. "A Piper" suggests the price would decrease to $100/ounce, though I doubt he/she is a certified economist. Nevertheless, that the monetary cost would drop upon legalization makes sense. In a world where marijuana is legal, providers do not need to be compensated as much because they would no longer bear the risk of going to jail.
So, on both fronts it appears that the price would decrease, encouraging more use. It would have to be a huge percentage tax to actually increase the price. But, if the effective price actually increased, what would be the incentive to obtain the drug legally? If we want a policy that restricts use, I suspect we need to look elsewhere.
What is legalization's opportunity cost? Currently, people who use marijuana devote a lot of time to obtaining the drug illegally and avoiding getting caught. Law enforcement spends time and energy fighting the use of marijuana. Users and dealers who are caught spend time in jail. Those in favor of legalization cite all of this as wasted effort. In fact the MPP cites studies that claim the government is missing out on $40 billion by not legalizing marijuana. That $40 billion is missed tax revenues plus wasted policing costs. Just think what we could do with all of this extra time and money.
On the other hand, there are time and monetary costs to regulating marijuana -- even if it is legal. Surely, we would not go from pure prohibition of marijuana to allowing everyone, including six-year olds, to take it. Just as with alcohol, there would have to be some legal age. That means that there would still have to be policing. If the lower price of legal marijuana actually encourages more use among groups we still don't want taking it, it is possible (even probable) that the amount we spend on policing marijuana would increase rather than decrease. Suppose we set the legal age at 18. Now, ask yourself how many resources would have to be devoted to policing high school students' use of marijuana -- especially given greater availability and a lower price.
Regardless of your perspective, it is hard to imagine that regulating legal marijuana would be costless. By this reasoning, we can't take the $40 billion in costs to be a pure gain. I suspect that regulation costs are high for legal drugs, but information on these costs is sparse. To obtain a baseline comparison, I conducted a Google search for "regulation costs of alcohol," which gave about four hits. The point, however, is that these costs are not zero, and they could be large. Before jumping wholesale on the legalization train, we need to understand the magnitude of these costs.
What else could legalizing marijuana do? Perhaps, the best argument for legalization of marijuana is that it would marginalize criminal organizations that profit from its trade. Recall that the 1920s gave us an experiment in the unintended consequences of prohibiting a popular drug, alcohol.
In retrospect, what did we get out of Prohibition? Powerful, organized crime. The 18th Amendment ban on alcohol ensured that the only businesses willing to sell the beverage were run by people who were not afraid to break the law. The revenues from alcohol supplied so many funds to the mafia that organized crime became very powerful. Indeed, the infamous Al Capone became rich during prohibition.
So, is organized crime stengthened by the sale of marijuana? I suspect so. To see why, take a related case. One of the big reasons for the spike in crime in the early 1990s was the huge uptake of crack cocaine use. Crime rose, not because of users going crazy on the drug, but because of rival dealers fighting over markets. This led to gang warfare, and rampant violent crime.
I suspect that similar battles are fought over marijuana markets. Legalizing marijuana would take these battles off the table. Plus, less marijuana revenue would go to gangs; more revenue would go to the government. Even as someone who thinks that governments waste our money, I think transfering a dollar from a gang leader to a bureaucrat is a social gain (unless that dollar is a bribe).
To summarize, I don't think we can make too much of the proposed tax savings from marijuana, but I think there is reason to entertain the thought of legalizing marijuana. A world where marijuana is legal is a world where gangs are less powerful. As someone who lives on the southside of Chicago, I could do with less influential gangs!