Monday, 9 April 2012

Abandon the prohibition on marijuana

A lot of time, effort and money is wasted on the enforcement of anti-drug laws. Over at Offsetting Behaviour Eric Crampton comes up with a good first move in the battle against the war on drugs:
Even better, legalize marijuana but regulate it similarly to alcohol and tobacco with restrictions on age of purchase and on permissible sales venues. Set an excise tax to keep the selling price to consumers about where it is now if demand-reduction is government policy. It's not simple to figure out what that tax should be because it's not obvious what production efficiencies could be achieved in a legalized production environment. But back-of-the-envelope numbers suggest excise revenues a bit over $150m (with a very wide confidence interval; I'd be very surprised if it came in at less than $100 million or at more than $300 million). If production costs in a legal environment were $30-$50 per ounce, and if we assume distribution costs roughly on par with production costs, then a legal market would deliver product to consumers at about $100 per ounce; if weed currently sells at about $300 per ounce, then excise and GST could total about $200 per ounce. A 2001 estimate put the black market in marijuana at around $190 million in 2001; if marijuana follows the CPI, that's about 830,000 ounces. At $200/oz in tax, that's about $165m.
What is interesting to a theory of the firm man, is what would happen to the costs of production and the organisational structure of producers if marijuana was legalised. There are reasons to think that cost could come down - e.g. there may be scale economies that could be taken advantage of and/or the costs involved with keeping your crop secret would disappear - or go up, e.g. the costs of labour could rise if current production is based on low wage labour or if competition forces higher quality/higher cost production methods.

One thing that is for sure is that, as with the removal of the prohibition on alcohol, the removal of the prohibition of marijuana would deny criminal enterprises one source of revenue. This would induce changes in the structure and areas of operations of such businesses, as the loss of a market would for any firm.

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