In Holland, Marijuana and hashish, are tolerated, that is to say, decriminalized but not strictly speaking, legal. However, the effect for many tourists who visit the coffeeshops, is that it is legal. They are able to buy and smoke their weed, without fear of arrest. In the coffeeshop only of course. In the USA, there are now 3 states that are very close to full legalization. California, and Colorado, have efforts being made to have a bill up for the voters that will have full legalization, and Oregon is not far behind.
What would be the economic impacts of legalization? At a time, when the economy of the USA is in disaster, would there be a benefit to the country, strictly from an economic perspective?
In a recent study for the Fraser Institute, Economist Stephen T. Easton attempted to calculate how much tax revenue the Canadian government could gain by legalizing marijuana.
http://www.fraserinstitute.org/researchandpublications/publications/2974.aspx
The study estimates that the average price of 0.5 grams (a unit) of marijuana sold for $8.60 on the street, while its cost of production was only $1.70. In a free market, a $6.90 profit for a unit of marijuana would not last for long. Entrepreneurs noticing the great profits to be made in the marijuana market would start their own grow operations, increasing the supply of marijuana on the street, which would cause the street price of the drug to fall to a level much closer to the cost of production. Of course, this doesn't happen because the product is illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust ensures that the supply stays relatively low. We can consider much of this $6.90 per unit of marijuana profit a risk-premium for participating in the underground economy. Unfortunately, this risk premium is making a lot of criminals, many of whom have ties to organized crime, very wealthy.
Stephen T. Easton argues that if marijuana was legalized, we could transfer these excess profits caused by the risk-premium from these grow operations to the government:
One interesting thing to note from such a scheme is that the street price of marijuana stays exactly the same, so the quantity demanded should remain the same as the price is unchanged. However, it's quite likely that the demand for marijuana would change from legalization. We saw that there was a risk in selling marijuana, but since drug laws often target both the buyer and the seller, there is also a risk (albeit smaller) to the consumer interested in buying marijuana. Legalization would eliminate this risk, causing the demand to rise. This is a mixed bag from a public policy standpoint: Increased marijuana use can have ill effects on the health of the population but the increased sales bring in more revenue for the government. However, if legalized, governments can control how much marijuana is consumed by increasing or decreasing the taxes on the product. There is a limit to this, however, as setting taxes too high will cause marijuana growers to sell on the black market to avoid excessive taxation.
When considering legalizing marijuana, there are many economic, health, and social issues we must analyze. One economic study will not be the basis of Canada's public policy decisions, but Easton's research does conclusively show that there are economic benefits in the legalization of marijuana. With governments scrambling to find new sources of revenue to pay for important social objectives such as health care and education expect to see the idea raised in Parliament sooner rather than later.
