Legalization of marijuana has gained some momentum recently in terms of conspicuous support in the press, expansion of medical marijuana freedoms, and relaxation of enforcement (see especially this article.) The argument is often made that the tremendous expense in terms of lives and money of the war on drugs does not justify whatever moral benefit there is of minimizing drug use.
But legalization would only make the drug war more costly. The reason is simple. Legalized pot does not reduce the incentive of government and its lobbyists to fight back the illegal market, in fact it only adds to that incentive.
The effort spent prosecuting the war on drugs is determined by a balance between the marginal cost of additional enforcement and the marginal benefit of reduced consumption. When pot is illegal, that marginal benefit comes from the (perceived by lobbyists) moral and cultural virtue. When pot is legal, the marginal cost of enforcement is the same but to the moral benefit would be added the financial stake in licensing legal producers and taxing consumption.
The government’s revenue from licensing and taxation of marijuana sales relies on foreclosing the black market which would not be subject to taxation and therefore would clear at a lower price. Government policy under legalized marijuana would be shaped by basic economics. The effort in fighting the black market imposes a cost on illicit producers which acts effectively as a tax. The level of that tax determines the market price in the black market and this is the maximum price that the legal market can sustain. If we start with the level of enforcement currently in place, this translates to a certain tax revenue that the government would earn were it to legalize pot and keep enforcement at its current level.
But raising the level of enforcement would allow the government to raise taxes on the legal trade. Since the marginal cost of enforcement was already equal to the marginal benefit based on moral considerations, the additional marginal benefit from increased taxes means that the government will increase enforcement.*
If you favor legalization of marijuana for libertarian reasons (or if you are just hoping for cheaper weed), you should instead push for a relaxation of enforcement without decriminalization (as the Obama administration is reportedly acquiescing to.) Decriminalization would give the create a vested interest in the drug war that would be hard to undo.
(*Theoretically, it is possible that, say, excise tax revenue would be increased by increasing consumption at the margin rather than decreasing. This would be true only if the current level of enforcement is already holding the black market price above the monopoly price. It is hard to believe that this is true today. )
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April 13, 2009 at 6:24 am
Steve
From what I understand, even with tax, legal marijuana would still be cheaper than what can be bought on the streets. The reason street marijuana costs as much as it does is that there is a high risk involved by those selling it and those growing it. Legal marijuana, on the other hand, would likely be the same cost, pound for pound, as tobacco.
April 13, 2009 at 7:26 am
Dan
Interesting post…
“The government’s revenue from licensing and taxation of marijuana sales relies on foreclosing the black market which would not be subject to taxation and therefore would clear at a lower price.”
This seems far from obvious to me… while it is true that illicit sales wouldn’t be subject to taxation, there are a number of factors that would drive people to purchase from legal sources as well as drive down costs for legal producers that may outweigh the effects of taxation:
1. Government licensed providers can make guarantees on source and quality that illicit providers would find difficult to match.
2. Legal providers offer convenience, as they are more easily found.
3. Economies of at least minimal scale could (conceivably) be employed in the production of government licensed drugs… this proves much more difficult for illicit operations.
4. Presumably, drug production expertise would be drawn to the legal production operations, as these have no associated legal risk (probably more true for a drug like marijuana, where many growers don’t grow just for the profit, but because they enjoy the process of growing itself… like beer making, in a way).
5. Even if legal prices are unable to undercut black market prices, buyers may still choose the legal option (assuming the price difference isn’t too large) simply because it is legal.
If even half of drug users began availing themselves of legal avenues for drug purchases, profits for illegal producers would plummet and many would be forced to shut down, potentially making enforcement costs less than they are today.
This is all lacking quantitative footing… if anyone knows of sources for information breaking down costs in illegal production (it would be useful to know what the “illegal overhead” is, i.e., additional transportation costs, security, the outrageous number of middlemen, etc.), that would make this more informed. This probably isn’t terribly hard to find, though I haven’t tried.
One study was recently released by Glenn Greenwald through the Cato Institute, which addresses the effects of decriminalization of all drugs on usage rates in Portugal. It’s definitely worth a read, though unfortunately it doesn’t deal with price or the production side of things at all. Anyone know of similar studies looking at effects of decriminalization/legalization on price (as these are very different policies, I’d imagine they have different effects).
April 13, 2009 at 11:23 am
Rabbit
Dan basically nailed all the points I was thinking of. Price isn’t the only factor in this situation. If people only chose what was cheapest despite the legality, iTunes wouldn’t exist.
April 13, 2009 at 5:12 pm
jeff
I agree that those are excellent points and that iTunes is a good analogy. However, it is not obvious what we are to take away from the iTunes experience. Has the RIAA’s “war on tunes” weakened? It doesn’t appear so. Relatedly, note that while iTunes tunes are cheap, as a percentage of marginal cost (and therefore the price without enforcement), the markup is close to infinite.
April 13, 2009 at 12:05 pm
Mike T
Wholesale legalization with taxation has worked quite well for tobacco and alcohol in part because the government set limits to allow for people to sell their own bootleg stuff in small quantities. By separating out Joe Shmoe from the Russian Mafia and their wholesale enterprise of importing tariff-free Russian vodka, the government not only prevented the creation of a new class of criminals, but made a bigger target of the serious violators. Aside from the people who sympathize with bumpkin bootleggers and their fight against the “dern revenuers,” no one feels sympathy for bootleggers who make a serious business out of what they do because they’re cheating the free market system and the government which supports it by modest regulation.
April 13, 2009 at 2:15 pm
bruce
We aren’t spending too much money battling the alcohol black markets…
A large majority of consumers will purchase via legal and trusted sources rather than doing shady stuff. This will cause the black market to shrink considerably.
April 13, 2009 at 4:35 pm
Mike
Shouldn’t this same logic lead to the conclusion that every product should have a black market with its own “war”? the war on tvs? the war on books? the war on organic lettuce?
what would make legal marijuana different? the assumption that the government would tax it at a higher rate (like tobacco)? is there a big black market in tobacco? or is it that the black market networks already exist for marijuana already exist and would fight to preserve themselves?
April 13, 2009 at 6:44 pm
jeff
The way to understand the difference in terms of the basic price theory from the example is that for these other markets, the “cultural externality” from consumption is positive (or at least not negative) and so the lobby (measured in terms of the surplus created) in favor of a free market outweighs the incentive to tax and restrict consumption.
March 26, 2010 at 9:57 am
Miguel
mike – your comment is my thoughts exactly. and i get a good laugh at jeff’s attempt to to hide a reply which makes no sense behind economic terminology.
jeff – i don’t know which “cultural externality” you refer to. the cultural externalities in much of the USA i have been exposed to are positive (or at least certainly not negative) towards smoking marijuana. perhaps the best evidence of the pervasiveness of this positive (or not negative) attitude is the very media attention etc. which you mention in your opening paragraph.
April 13, 2009 at 8:02 pm
libfree
The other commenter’s hit on most of the points I would have liked to make but I felt the need to stress some important points.
We have experience with this, the re legalization of alcohol. It took a long time to drive out the undesireable bootlegging, but it did disappear.
If taxation reaches certain levels then the product is essentially illegal. So we have a laffer curve with drugs (like anything else), the higher taxes get the less we have to tax. Multiple reasons, substitution and illegal production being the largest, but we are still left with a tax level that will maximize government revenues.
If the above were true, we could expect similar results from tobacco. If the only reasons are cultural, then we could expect them to change over time. Honestly, the conveniences and safety factors involved with the legal sellers would be great enough to get a strong following on the margin. Itunes was a good example listed above. The RIAA might still be pursuing convictions at the same level, but I think that their investment in pursuing those convictions was much smaller. They only wanted to make an example of X number of people. The US government is pursuing aggressively on all levels of the trade. At the same time, the RIAA is trying to get people to pay for something that they used to get for free. Our goal in legalizing drugs would be to get people to continue to pay, but pay a different venue. I think that is a little easier to achieve.
April 14, 2009 at 9:03 am
Dan
Two quick thoughts on the iTunes analogy:
I think it is a relevant example insofar as it demonstrates the pull of a legal and (perhaps most importantly) convenient product over an illegal and (supposedly) less convenient alternative. However, the similarities end there. Those who make illegal music available clearly aren’t motivated by economic factors, since almost all illegal music is free. Hence it is impossible to make their “business” economically unsustainable by underpricing them. This is not the case for drug producers and traffickers.
Furthermore I’m not sure how many people switched from downloading illegally to downloading legally… I wouldn’t be surprised if a substantial percentage of legal downloaders were never involved in illegal downloading, which I don’t think has decreased substantially even since iTunes. In the case of drug legalization, my guess would be that it would be much more zero sum (the study of decriminalization I mentioned above suggests that drug usage rates don’t rise much if at all when drugs are decriminalized)… most purchasers of legal drugs would have been former purchasers of illegal drugs, thereby depriving the illegal producers of consumers.
If most consumers end up choosing the legal alternative (for all of the reasons that have been discussed), there really won’t be much of a drug war to fight.
April 14, 2009 at 9:58 am
420 guy
Your thinking only short term. The fact is the black market would fade and disappear over time. Certainly not overnight, and initially there would be an increase in the drug war to stamp out the black market. But assuming the taxation was reasonable, legal marijuana would be cheaper than street marijuana, because the cost to produce marijuana is relatively low, but illegal trade is full of risk. Risk v. reward formula would keep black market marijuana expensive, especially since cops would no longer be hounding users and legitimate sellers, only focusing on the illegal sellers so the risk increases while profits decrease.
In short, as long as legalization, regulation, and taxation is done right, then the black market all but vanishes, as does the war on drugs.
April 14, 2009 at 1:29 pm
John Moore
Unless the taxation were extreme, the legal costs would be so far below the current illegal costs as to remove almost all incentive for illegal activity.
At some taxation level, a black market re-appears of course. Even then, however, it is less likely to be as vicious and corrupting as what we have now, unless the taxation level is really a prohibition in disguise.
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