The Economics of Marijuana


February 18, 2011 – An advertisement for Oaksterdam University reads “Cannabis Industry Now Hiring,” along with claims to a salary between $50,000 and $100,000 dollars. To the average American, such an ad would surely be deemed a joke — but in Oaksterdam, a district in downtown Oakland lined with medical marijuana dispensaries, training centers, head shops and the like, cannabis is serious business.

Marijuana has been used for thousands of years, and hemp itself was for centuries of great importance to the United States economy. But in the early to mid-20th century, many states began to ban the drug (the reasons for which are moot and worthy of their own article), and soon marijuana consumption became illegal under federal law.

The latter half of the 20th century saw a resurgence in cannabis usage and in 1996, California became the first of several states to allow the use of the drug for medicinal purposes. Since, “medical marijuana” has exploded with an estimated 2,100 cannabis dispensaries in California alone. Last year, California once again pioneered the push to legitimize marijuana with a proposition, Proposition 19, that would make it legal in a manner similar to alcohol; the act was ultimately defeated by a narrow margin.

Yet the question still stands — if countless studies (some more legitimate than others) claim the drug has a variety of medicinal benefits and is less harmful than tobacco, alcohol and other drugs, why is it still illegal under federal law?

One important facet of California’s proposition was an excise tax that proponents claimed would bring billions of tax dollars to a state in economic turmoil. From an economic perspective, it seems pretty rational — imposing a tax on a multi-billion dollar market and cuttting spending on law enforcement will yield more money.

Let’s think in terms of real dollars: a 2003 study by the Office of National Drug Control Policy estimated domestic spending on cannabis prosecution to be a whopping $29 billion each year. Furthermore, a study commissioned by the United Nations in 2006 estimated the North American cannabis market to be worth upwards of $60 billion per year, more than the combined value of corn and wheat. It seems obvious that the economic benefits would be outstanding, but there are other contributing factors.

Price points
First and foremost, it is a basic rule of economics that the easier it is to obtain a product, the less the product will cost. Taking marijuana off the black market and into a legitimate marketplace will make it easier to buy and consequently cause a considerable drop in price. In fact, a study by the international think tank Research and Development Corporation concluded that Proposition 19 could potentially lead to a decrease in the price of marijuana by as much as 80%.

If prices were to fall so drastically, it is unknown whether the economic tax benefits would outweigh the social costs.

Cannabis consumption
Secondly, the law of supply and demand tells us that as the price of a product decreases, consumption will increase. This is something that legalization opponents are quick to point out, and it is difficult to predict exactly how marijuana usage in the United States would change.

Enter the Netherlands, a country notorious for its lax (albeit somewhat complex) drug policies. Though marijuana isn’t exactly legal in the Netherlands, there exists a tolerance policy where possession of up to five grams is not prosecuted. The country distinguishes between “soft” and “hard” drugs — the idea being that tolerance of soft drugs will keep people away from the harder ones.

This legal distinction has faced much criticism, yet surprisingly young adults in the Netherlands have lower rates of “soft drug” use than those in most other Western European countries with less tolerant laws. Rates in Spain and Italy were twice as high as those in the Netherlands between 2002 and 2004, and cannabis use actually declined in the Netherlands in 2009 according to a study by the European Monitoring Centre for Drugs and Drug Addiction.

Weed prohibition
Many compare the illegality of marijuana to the Prohibition Era of the 1920s and 30s, and argue that legalization would have effects similar to those of the repeal of the Eighteenth Amendment. However, there are critical differences between the legality of alcohol and cannabis.

Socially, alcohol has widely been considered a part of American society, whereas marijuana carries a less acceptable reputation. Economically, the production of alcoholic spirits and beverages is difficult and costly on an individual level, and major alcohol companies have existed for centuries. Marijuana production is vastly different — there exist no major marijuana companies, and the thought of corporate cannabis sounds silly.

Nevertheless, the Prohibition Era was notorious for multi-million dollar crime rings involved in the underground trade of alcohol, and the same exists today for the marijuana industry.

The American marijuana trade is a large part of the ongoing drug war with and within Mexico, Canada and other countries. Pro-legalization activists argue that by legalizing marijuana, criminal activity would literally decrease and take the “shady” aspects out of the drug trade.

We may never know exactly what America would be like should marijuana be legalized, but the debate over doing so will surely never die until it happens. Source.

See Also:

How Big Is The Marijuana Market?

Legal Pot Means Big Savings on Law Enforcement


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