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About.com (Canada), 2005-09 Should Governments Legalize and Tax Marijuana? by Mike Moffatt
Examining a Recent Study on Legalization
The war on drugs is an expensive battle, as a great deal of
resources go into catching those who buy or sell illegal
drugs on the black market, prosecuting them in court, and
housing them in jail.
These costs seem particularly exorbitant when dealing with
the drug marijuana, as it is widely used, and is likely no
more harmful than currently legal drugs such as tobacco and
alcohol.
There's another cost to the war on drugs, however, which is
the revenue lost by governments who cannot collect taxes on
illegal drugs.
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.
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:
If we substitute a tax on marijuana cigarettes equal to the
difference between the local production cost and the street
price people currently pay--that is, transfer the revenue
from the current producers and marketers (many of whom work
with organized crime) to the government, leaving all other
marketing and transportation issues aside we would have
revenue of (say) $7 per [unit].
If you could collect on every cigarette and ignore the
transportation, marketing, and advertising costs, this comes
to over $2 billion on Canadian sales and substantially more
from an export tax, and you forego the costs of enforcement
and deploy your policing assets elsewhere.
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.
Mike Moffatt: mike@moffatt.us
__________________________
About Mike Moffatt - Canadian citizen, born in 1977.
Was an undergraduate at the University of Western Ontario
from 1995 to 1999. In 1999 earned a combined honours degree
in Economics and Political Science and was awarded a gold
medal as the top graduating student.
Graduate work at Queen's University at Kingston, and spent
time as an undergraduate in Maastricht, the Netherlands, on
exchange.
In 2001-2002, a visiting student in Applied Math at the
University of Western Ontario taking courses in both the
Applied Math and Pure Math departments.
In the Summer of 2002 doing research in Quantative Finance
under professors Matt Davison and Henning Rasmussen.
Graduate student in Economics at the University of Rochester
in Rochester, NY.
From Sept. 2002 and onward will be at the University of
Rochester in Rochester, NY completing a PhD in Economics.
Main areas of interest are Political Economy, Game Theory,
and Public Finance and Policy.
Pubdate: September, 2005 © 2005 About, Inc. |
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