Leslye Barth: Legalization of Marijuana - Economic Implications

After several years of debate and Supreme Court rulings, cannabis has been legalized in four states and the District of Columbia. More states are moving towards this shift, and it is predicted that 23 states will legalize marijuana by 2020. As this is an unprecedented movement in the US, economists are watching the economic arguments in favor of legalization unravel as the drug enters the real-world market. One main rationalization for the legalization of marijuana was that the regulated sale of the drug would drive down production costs and retail prices, while generating tax revenue and refocusing drug enforcement efforts on more socially harmful narcotics (i.e. cocaine, heroin, crystal meth). Economists are now observing that this isn’t exactly what is happening, due to variables including state tax policies, the shifting behavior of buyers and sellers, and contradictory drug laws nationwide.

In Colorado, for example, the increased taxes have caused the price of marijuana to double, while the black market still exists and is offering at less than half the post-tax price. This could be due to the limited inventory and consumer demand, but pot retailers are incentivized to go high-end and specialize. Policymakers are therefore being challenged to get the taxes correct to avoid an even stronger black market. The legalization is predicted to save billions of dollars annually from reduced drug enforcement costs and tax revenues, but if the expanded market starts to displace alcohol sales (or worse, consumers start combining the two), these gains could be lost (more traffic accidents, health costs, etc.). I think the biggest factor is going to be law enforcement – how seriously authorities monitor unlicensed sellers will shape market supply and pricing trends. Border states of Colorado are already attempting to sue the state of Colorado for the negative economic externalities: Nebraska and Oklahoma have seen significant increases in crime related to marijuana since the legalization in Colorado. In my opinion, only time will tell us if the legalization makes economic sense for the US, as economists have already observed that the market for marijuana has not behaved as predicted.