Thursday, May 7, 2009

Marijuana: Why prohibit what you can tax?

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!


  1. Hey Tony,
    You make some good points. The hundreds of billions of dollars that our government spends on law enforcement with zero results is an eye-opener in itself! I think you should also look at the tremendous cost that society faces with increased crime i.e., murders, theft, assualt, etc. Look at the gangland slayings in Mexico that is now terrorizing the whole country.

    You are right that the amount received as tax revenue would not be all gain. Some revenue would have to go into drug rehab and prevention programs. BUT TAX AND REGULATE THE HELL OUT OF IT. The users will continue to pay probably up to the market rate you quote of $350 / ounce. This would be a tax revenue bonanza! Maybe Obama could even give us another tax rebate :)
    Would that be a drug tax rebate?

    When the scientific results are analyzed about which drug is the most dangerous - it's ALCOHOL that should be illegal. The harmful effects of alcohol far surpass that of marijuana. Alcohol is legal because, we tried the prohibition experiement already and it didn't work. Why didn't it work? For the same reasons we find in this so-called war on drugs!
    your opinionated father-in-law

  2. I can't help but agree with the opinionated-father-in-law and greatly enjoyed reading your article. I can't say I'm a smoker myself, and if it became legal I probably still wouldn't smoke, but looking at history and the way the world works, I can't help but find a way to equal the scales on this fight. For me, the scales tilt far to much to the side of legalization, and until someone gives me a good, strong reason to tilt it the opposite, that's the way I will stand. Even though I think pot heads (just like alcoholics) are a sad group of people, I'm sure the crap can be regulated, given in dosages, highly taxed just like every other addictive, harmful substance out there.... nicotine, alcohol and all that jazz. Good job on the analysis Tony.

  3. I feel like there is another good point not mentioned. I believe there is a sort of a "scale of severity and acceptance," that people place on drugs, alcohol and other substances.

    For example, on the current scale, we have legal drugs like tobacco, caffeine and alcohol that are, well, legal. Therefore people look at them and say "well the government says its OK to use them so I may as well. But more importantly, is looking at the scale as you look further down it. In relation to the legal drugs, there are the illegal ones like Marijuana,Cocaine, Crack, Heroine, Ecstasy etc.
    Currently marijuana is illegal, but many, many people still use it and consider it not a big deal to use. If marijuana is legalized, than the scale may shift. People may grow accustomed to marijuana being legal and say "Well cocaine (or another harder drug beside marijuana on the scale) is illegal, but so was marijuana at one point. How bad can it be for me?"

    Then people progressively start to use harder and harder drugs as a result of marijuana being legalized. Just a theory, but I think it may actually occur, to some extent, if marijuana is legalized.