Economic Impact Of Marijuana Legalization Economics Essay

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Drug dealers in America have mastered the concept of supply and demand. They have identified their target audience and are doing an incredible job at keeping competition down. They rapidly work towards a monopoly in their respective areas. They even keep ahead of the game by obtaining the best product at the lowest price before hiking up the price to potential buyers.

They are running an underground gold mine and the government hasn't been getting a penny of the proceeds. In fact, the government and taxpayers spend between 20 and 25 billion dollars a year (Osler, 2012), on prosecuting dealers and incarcerating those who possess marijuana. But facts are facts and this is how America works. It may be for this reason that voters in Washington and Colorado decided to legalize marijuana. On November 7, 2012, state legislators in both Washington and Colorado passed an initiative and an amendment, respectively, to allow for the possession, distribution, and private recreational use of cannabis.

From an economic perspective, there would be numerous benefits to legalizing marijuana. The states expect to see a rapid decline in arrests for marijuana possession, saving money from the reduced need for law enforcement for marijuana prohibition. This proves to potentially save Colorado alone an average of $40.1 million, (Stiffler, 2012), in costs associated with incarceration.

Not only will the economic impact of legalization of marijuana help save the government on law enforcement expenses, but it will also encompass the possibility of large sums of revenue from the market supply and demand of the newly legalized product, generating an impressive profit from sales tax. As a new industry emerges within the workforce, desperately needed employment opportunities will arise across the country, stimulating the economy by initially providing 4,200 new jobs (Fottrell, 2012). It will also help upsurge our Gross Domestic Product (GDP), as more goods will be produced and retailed.

The economic impact of the legalization of marijuana covers many aspects of the economy. In Mark Osler's "U.S. Should Honor States' New Pot Laws -", Osler discusses the conflict that arises from a state passing a law that contradicts a federal law. He examines the sides of both the proponents and opponents to the federal government cracking down on drug use in Colorado and Washington. Osler goes in depth about how the federalists support the States and want the government to leave them alone to govern their states how they choose, and how the moralists would like to see the federal government enforce the federal narcotics laws despite the voter's decisions in the states. The article also analyses how harder drugs deliver a lesser punishment than more minor drugs and how drug laws in the past have done little to permanently curb drug use.

"Amendment 64 would produce $60 million in new revenue and savings for Colorado", by Christopher Stiffler, presents a systematic approach to how the government will benefit from the passing of the amendment. The article discusses the various ways that the legalization of marijuana will positively affect the economy and also describes in detail the how tax revenue will be generated and utilized to benefit Colorado. Stiffler also focuses on the details of the amendment itself and how a shift in governmental thinking can save millions of taxpayer dollars.

Quentin Fottrell's "How to Invest in Legalized Marijuana", describes the rapidly growing market demand for marijuana and marijuana related products. He gives descriptions of several marijuana centered companies and offers his opinion on the direction of the economy. Fottrell also mentions how the marijuana market is spreading over to other industries and explains the benefits and pitfalls of investing in marijuana related stock.

"Unperturbed Puffery", by B.A., is an article that focuses on the likelihood of the Obama administration to enforce federal laws in Colorado and Washington. B.A. takes a strong stance on the issue and sides with the federalists who prefer a hands-off approach from the federal government. The articles examines the costs related to incarcerating people with marijuana related charges and concludes with mentioning how the government should have more important issues to tend to than marijuana possession.

Mike Moffatt's "Would Marijuana Legalization Increase the Demand for Marijuana?", answers a reader's question about the demand for marijuana if it becomes legal. Moffatt consults the experts to form an opinion on the issue. The experts seem to believe overall that demand will increase unless the price goes up too much, in which case it will stay the same. The article also mentions how the legalization of the drug may have the opposite effect because the allure of marijuana comes in part from the fact that it is illegal. Moffatt also looks at other countries experiences with the legalization of marijuana and concludes that legal or not, people will continue to use it.

"Should Governments Legalize and Tax Marijuana?" by Mike Moffatt discusses the economics of drug dealers and compares their profits to potential profits that the government could make by legalizing marijuana. He breaks down the profit percentage from street sales and considers a shift from street profit to governmental tax revenues. Moffatt also considers the health of the consumers and educational benefits that can arise from the legalization of marijuana.

C. Whitaker's "The Economic Effects of Legalizing Marijuana", takes a look at the business aspect of legalizing marijuana. The article discusses how the underground business can become legal and even how former underground drug dealers can get off welfare and become legal entrepreneurs. Whitaker also examines the economic impact of the marijuana and how a lowered price would allow for funds to be spent elsewhere in the economy. Whitaker claims in the article that the legalization of marijuana will help put an end to poverty by creating business opportunity for drug pushers and will also save money for prisons everywhere.

As stated before, the economic impact of illegal marijuana comes at an expense to us all. This expense is obtained from the costs associated with cracking down on those who are buying and selling drugs, prosecuting them in the courts, and providing food and shelter for them in jail cells. According to Mark Osler, the amount that has gone towards these efforts has been between 20 and 25 billion dollars a year for the past decade (Osler, 2012). When breaking these figures down, it is revealed that, "12.4% of federal prisoners convicted on drug charges were locked up for marijuana offenses. That's about 11,630 people, at an average cost of $25,500 to $26,000 per person per year" (B.A., 2012). Multiplying these figures yields a result of more than 290 million spent annually on jailing inmates, at the federal level, who were caught with marijuana. In the grand scheme of things, this is quite a sum of money that could be allocated towards other things.

A reporter for The Economist says that, "Prosecuting people for marijuana offenses is a waste of resources" (B.A., 2012). The reporter's sentiment is understood based on the fact that, "Four out of Five of the 1.64 million people arrested for drug violations were accused of possession, and half of those arrests were for carrying what were often very small amounts of marijuana" (Osler, 2012). When comparing the effects of marijuana, a schedule 1 narcotic, and the effects of cocaine and opium, schedule 2 narcotics (less offensive), (Osler, 2012), it makes little sense that a substance that has no known scientific death toll, cancer causing side effects, or even evidence of being an addictive substance should cause so many people to be put behind bars at tax payers' expense. This is one reason why voters have decided to make marijuana legal in Washington and Colorado.

The expense of police in Colorado alone shows substantial potential governmental savings. According to Christopher Stiffler and Colorado's direct budget costs for enforcing marijuana prohibition, $40.1 million is spent annually enforcing marijuana prohibition, (Stiffler, 2012). This is seen in the chart below, (Stiffler 2012).

Colorado's direct budget costs for enforcing marijuana prohibition


Total spending

Percent spent enforcing prohibition

Amount spent enforcing prohibition















$40.1 million

As explained on a state and national level, legalizing marijuana has a very positive effect on the police expense, potentially creating a notable amount of revenue from savings alone.

Not only are expenses a detriment from illegal marijuana; but forgone profit is a negative effect as well. An economist named Stephen T. Easton conducted a study using data from Canada to calculate the amount of tax revenue that legalizing marijuana could bring to the government (Moffatt, 2012). The study showed that the average price of .5 grams of marijuana sold for $8.60 on the street with a production cost of only $1.70. (Moffatt, 2012) These figures would amount to a $6.90 profit for drug dealers. Any survivor of an ECON 5003 course would know that with a profit like this, competition would be intense. What keeps these drug dealers with a local monopoly is the fact that the possession and distribution of marijuana is illegal and subject to serious jail time. This risk factor is what keeps others from trying to get in on the action. This also keeps supply restricted and demand high for the product, leaving drug dealers with hefty profits at the expense of the government.

Now that marijuana has been legalized, it is expected that the demand for marijuana will increase. With the risk factor gone, far more people will engage in recreational activities involving marijuana. Drug dealers will no longer make as much profit due to the fact that anyone can potentially sell marijuana. With a larger supply, the prices from the once exclusive drug market will drop drastically resulting in a price much closer to the cost of production.

With marijuana being legal, there will be government run distributers who will, based on basic supply and demand modules, offer the drug at a much lower base price. However, because marijuana will be closely regulated much like tobacco and alcohol, the taxes from licensing and distribution will drive the total purchase price up and revenue will rival that of current day drug dealers. When transferring the profit once enjoyed by drug dealers to the U.S. government in the form of taxes and distribution costs, and leaving transportation and marketing issues behind, the government would end up with revenue of $7 per .5 grams of marijuana, (Moffatt, 2012) With the collection of tax on each marijuana "cigarette" and again leaving transportation and marketing issues behind, this adds up to over a $2 billion profit, (Moffatt, 2012).

Without the legalization of marijuana, the street price of marijuana will stay the same because there is a very limited and risky to purchase supply. The distributors or "drug dealers" enjoy a relatively stable quantity demanded because of this unchanging price. Now that marijuana has been legalized, the demand will increase due to the fact that consumers no longer have a risk in purchasing marijuana. Looking at a supply - demand curve, Figure 1 shows the effect that legalizing marijuana would have. With the demand curve increasing in order to stay with equilibrium, the price equilibrium would increase.

Figure 1: Effect of Legalizing Marijuana

Although legalizing marijuana has great potential of increasing tax revenue, a sense of morality is likely to appear due to the perceived negative effect of health throughout the population. With this in mind the government can either decrease consumption by raising taxes or increase it by dropping taxes. Figure 2 shows the effect if taxes are increased and consumption of marijuana is decreased.

Figure 2: Increase in Marijuana Tax

As shown by the graph, if marijuana taxes are increased, the supply curve would shift to the left. The quantity supplied would decrease from Q*1 to Q*2. This shift in supply changes the equilibrium from E1 to E2 and the price is increased from P*1 to P*2. Increasing taxes too much can have a negative effect because if taxes get too high marijuana growers will want to sell in the black market to avoid the high taxes.

In addition to law enforcement expenses and forgone profit, another aspect that illegal marijuana hinders is the emergence of a new industry and job opportunities across America. With the legalization of marijuana comes a plethora of career options and job opportunities. Also, those who were previously "victims" of incarceration from the distribution of cannabis can now possibly start a legal profitable business. One such business that has already taken off is the medical marijuana industry. According to Quentin Fottrell from Market Watch, the medical marijuana industry is, "estimated to be worth about $1.7 billion as of 2011", (Fottrell, 2012). "In Colorado alone, sales topped $181 million in 2010, and the business employed 4,200 state-licensed workers," (Fottrell, 2012).

The new marijuana industry spans from medical producers, to agricultural-equipment firms, dispensaries, vaporizers, and even edible goods. Producers are now able to ship the drugs out to the customers, as drug trafficking is no longer be illegal. This is one of the many ways new jobs are being created.

The marijuana industry will also raise our Gross Domestic Product because it can be grown and sold here in the USA. According to the United Nations Office on Drugs and Crime, "Illicit drugs accounted for 1% of the world's GDP," (Whitaker, 2009). One percent doesn't sound like much at all, but this 1% is higher than 88% of all countries GDPs in the world (Whitaker, 2009). People participating in the marijuana industry would not only have a stable source of income, but also a legal source that would be taxed.

From the consumer's perspective, the legalization of marijuana could mean lower prices. Since there will be countless ways for purchasing legal marijuana, more competition will arise which will result in decreased prices for the consumer. Consumers will no longer have to pay such a high price resulting in an increase in their available funds that they can invest, putting money directly back into the economy.

The newly legalized marijuana market also creates investment opportunities. "Medbox (OTN:MDBX) [has] an OTC stock with a $45 million market cap," (Fottrell, 2012). "Medical Marijuana (OTN:MJNA), [has] an OTC stock with a $69 million market cap, (Fottrell, 2012). And "Cannabis Science in Colorado Springs, Colo. (OTN;CBIS), [has] an OTC stock with a $41 million market cap," (Fottrell, 2012). These new investment opportunities encourage investors to feed into the economy and stimulate the free market. As old products are losing ground, this new market is rapidly gaining appeal and helping the economy every step of the way.

In conclusion, the legalization of marijuana brings up an interesting opportunity for the government.  If they become the suppliers of the good, they can produce on the true supply or marginal cost curve and then replace the cost of arresting and fighting dealers with marijuana revenue. A great deal of tax payer money goes into catching those who buy or sell illegal drugs on the black market, prosecuting them in court, and housing them in jail. These costs seem particularly exorbitant when dealing with the drug marijuana, as it is widely used, and is likely no more harmful than currently legal drugs such as tobacco and alcohol. When looking at marijuana's effect on the economy as a whole, the positive and lucrative impact cannot be ignored. From the creation of new job opportunities, to the abundant new supply of revenue, and even the savings incurred from removing prohibition, it is clear that the economic impact created by the legalization of marijuana is beneficial to us all.