Thursday, January 28, 2010

Don't legalize marijuana

LA Times Opinion article entitled "Don't legalize marijuana" (January 28, 2010) misses one fundamental lesson on the subject of drug legalization: enough taxation can reduce marijuana consumption to current regulation levels.
Legalization almost certainly would bring with it additional substance abuse in the state, and the long-term public costs associated with that would vastly exceed the relatively modest amount of new revenue legal weed might bring in.

The economics of illegal goods weighs extremely heavily in favor of legalization and taxation rather than banning and enforcing, as Gary Becker, Kevin Murphy, and Michael Grossman outline in The Economic Theory of Illegal Goods: The Case of Drugs (NBER Working Paper, 1994).

Corrections would suggest that when marijuana is illegal, the government raises the cost of selling marijuana until production falls to the socially optimal quantity. This is a costly activity. Police must be hired, lawyers must be provided, and offenders must be jailed. The end result of all the government's expenditure is to raise price and reduce quantity consumed by the law of demand. However, legalizing marijuana and taxing its sale until the quantity demanded was reduced to the same socially optimal level as regulation would result in no change in marijuana consumption, by construction.

The graph below (click to enlarge) demonstrates the possible ways in which government can reduce marijuana consumption to its preferred point. Raising the cost of production and shifting the supply curve back is costly and loses consumer surplus. On the other hand, taxing marijuana use until consumption falls to Q_regulation results in government revenue that simply does not exist when marijuana is illegal. It is the difference between paying to destroy money and being paid to destroy it.

If the government seeks to regulate the quantity of marijuana consumed, it should choose to do so with a pricing mechanism such as taxation (from which it can earn revenue) rather than a ban (which is costly to enforce). The result is otherwise the same.

Corrections does note our a priori belief that demand will not shift out, or not shift out much, if drugs are legalized. We do not see the "stigma" of marijuana use as a major factor in utility inputs of extra-marginal users. We might further note that we see addiction arguments as lacking firm foundation in human behavior, as discussed in a previous post.


  1. The writer of the blog makes an excellent point that the use of taxation as a means to control the extent of use. There are at least two additional pertinent elements. First, illegal status tends to constrain use differentially to areas where law is less respected or at least less effective. In the US the illegal status of marijuana or crack cocaine or other drugs tends to confine sales, distribution and to some degree consumption to ghetto areas. Making marijuana or crack cocaine legal would allow the expansion of sales and distribution to all areas - for example the suburbs - likely resulting in expanded use and an expansion of adverse social consequences both in terms of numbers of users and in terms of affecting more empowered parts of the electorate whose political pressure would doubtless be made manifest. Second, as one considers the wider principle of legalization and taxation there is a different aspect to consider. Drugs affect individuals differentially for a variety of biological and other reasons. For any given drug different people have different propensities to addiction. For example, about 6-10% of people exposed to alcohol for as little as a first exposure to several exposures will over time become addicts while 90+% of people who consume alcohol can take it or leave it. These latter people with a propensity not to be addicted are said to be able to "chip" alcohol. For opioids and tobacco the same phenomenon occurs but the number of potential addicts is larger - in a broad ballpark around 20% of people being at risk for addiction with 80% of people for example being able to use an opioid for pain for an extended period without coming to exhibit drug seeking behavior (that is to "chip" opioids or cigarettes. For amphetamine type drugs the proportion of addicts to chippers is far higher - likely on the order of 30-60% depending on the amphetamine with the number of chippers being correspondingly lower (70-40%). The point is that while marijuana has a relatively low rate of severe addictive behaviors associated with it and a high rate of chipping, other drugs are less benign. People who are addicted do continue to show some level of "rational" behavior in the sense of price responsiveness but addicts are by the nature of the disease incompletely rational. Addicts will engage in extreme and irrational activity including violence and law breaking at felony levels. The issue is that while drugs are illegal and distribution is highly restricted there are many people who are potential addicts who are simply not exposed to the addictive drug and as a consequence are able to live productive lives and not be addicted. Pricing issues might to some degree permit a similar constriction of the potential exposure of addicts but for many potential addicts not exposed at this time because of limits of distribution, their financial characteristics may allow them to surmount limitations on exposure due to pricing. It is also noted that if taxation is raised to too high a level then the taxation itself will be surmounted and we will have just created a new kind of illegality. (Not unlike the current cigarette smuggling industry). The bottom line is that the Corrections blogger is correct that taxation could be used to help control exposure, one can anticipate far wider distribution and for the highly addictive substances far higher levels of addiction and associated social damage in localities and social circles currently out of the loop of distribution.

  2. Your comment was developed enough to warrant its own post in response.

    Corrections has responded to this comment in a separate post:
    "Student1776 on 'Don't Legalize Marijuana,' and Response".