The Legalization of Marijuana

DePauw University

Economics

2226

The Legalization of Marijuana: An Economic Analysis

Abstract: This paper will analyze the benefits of marijuana legalization on the American Economy. Economists have consistently supported the idea of legalization and offered insightful reasons as to why it is beneficial. Analysis carefully examines how tax revenues for the government can be earned using an excise tax and explained through elasticity's of supply and demand. Lastly it shows how government expenditure on prohibition is hurting the economy and could save billions in taxpayer's money and benefit the economy as a whole.

Table of Contents

Introduction: 1-3

Literature Review: 3-7

Analysis: 7-13

Conclusion: 14

Introduction:

The current drug laws for marijuana enforcing prohibition are harming the American economy more than benefitting it. Legalizing Marijuana, while often an ethical issue can be explained by economic intuition to show the benefits to our economy. Legalization would have substantial effects on taxes, government revenues, and law enforcement and incarceration costs on a state and federal government level.

For years, Marijuana has been one of the most popular recreational drugs in the United States. Marijuana, Economically speaking, is a good because it is a material that satisfies the wants and needs of a human. It also provides the consumer of the product with a certain level of satisfaction or utility. Unfortunately for all consumers, marijuana is an illegal good that is only sold on the black market. The opportunity cost for both producers and consumers is extremely high because of its illegality. For decades, people have debated the possibility of legalization of marijuana, removing the drug dealer's extreme profits and transferring those to the government. However, different Presidential administrations and state governments have continued to turn down the possible legalization. This paper will investigate the possible benefits of legalization in three steps. First, it will briefly introduce how the black market currently works and briefly discuss how to make the marijuana business a profitable industry for the United States. Then it will examine what many economists have said about the issue over the last couple of decades. Finally, it will offer economic intuition, showing the benefits of legalization and the removal of the black market.

The markets for many goods are regulated and the trade of other goods is illegal. A drug such as Marijuana is one of the best-known examples of an illegal good currently in circulation. Despite the illegality of Marijuana, the buying and selling of the drug has resulted in a multi-billion dollar business. The current black market operates under the same economic model and principles that describe a legal market. Within the market for marijuana, supply and demand is determined often by the cost of trading the drug. Considering marijuana is illegal, the cost of trading it increases. 'The increase in the cost of trade is dependent on how it is enforced and possible penalties from law enforcement' (Parkin 144). When the penalties are larger, the costs for marijuana will increase, affecting shifts within the supply and demand model. Sellers and buyers are both affected from penalties against illegal drug trade.

The issue with marijuana prohibition has picked up steam in the past couple of decades. In the United States, individuals, businesses, and the government have debated on the possible effects of the legalization of cannabis. Possibly the most powerful way to examine the effects of marijuana decriminalization is the impact on the American economy and the government budget. The legalization of marijuana would offer significant advantages to the economy. As it exists today, gangs, cartels and occasionally legal medical marijuana dealers run the marijuana industry. Cartels and gangs are receiving large profits that could be put in the hands of the government while also removing the violence caused by these organizations. Advantages from legal distribution would be legal taxation, as well as a decrease in the government's costly expenditure on law enforcement and criminal incarceration.

In recent years the United States economy has been experiencing a major recession and a government debt that has grown ever larger. With more economists arguing for the legalization of marijuana, now seems to be a good time to address the benefits of a regulated market. With a government debt pushing into the trillions of dollars, the legalization of marijuana is not going to be the answer to the American economic issues. However, it could offer a substantial benefit. With a multibillion-dollar industry currently operated by gangs and cartels, it seems realistic to legalize an industry that is only causing harm to American citizens.

Literature Review:

Neo Classical Economists are often the biggest advocates for the legalization of marijuana. Joshua C. LaGrange (2000) in "Law, Economics and Drugs: Problems with Legalization under a Federal System" examines how neo-classical economists argue against prohibition. Within the drug market, users and suppliers want to maximize their own utility, however government intervention often inhibits their ability to maximize utility (LaGrange 2000). Neo-classical economists who examine the drug market also use the existence of externalities, or factors that do not affect the decision maker. Externalities are a cost or benefit that comes from production or consumptions, but falls on someone other than the producer or consumer (LaGrange 2000). The current black market is producing negative externalities in the form of violence in America's streets. Economists argue that prohibition is only useful when the costs outweigh the savings. In the current state, policies keeping prohibition are keeping the savings from outweighing the costs. Therefore, LaGrange (2000) argues that economists believe the current drug policy is economically inefficient.

The