In the 1920’s congress experimented with the prohibition of alcohol. On February 20, 1933 Congress acknowledged the failure of alcohol prohibition. Today Congress faces a similarly failed prohibition policy. Futile efforts to enforce prohibition have been pursued even more vigorously in the 80’s and 90’s then they were in the 20’s. Total federal expenditures for the first 10 years of prohibition amounted to 88 million, about 733 million in 1993 dollars. Drug enforcement cost about 22 Billion in the Reagan days, and another 45 billion in the four years of senior bush; another 16 billion for 1998, and 17.9 billion in 1999. About 2.6 Billion dollars was spent on marijuana enforcement in the year 2002[1]! These figures show how important drug policies are to everyone and that we can not merely ignore these numbers. Billions of dollars are spent every year to combat the transportation and use of marijuana.

Advocates of legalization believe prohibition reduces marijuana trafficking and use, thereby limiting crime, improving productivity and increasing health. Whereas Critics believe prohibition has only modest effects on trafficking and use while causing many problems typically attributed to marijuana itself. The question is how does this affect our economic statues and more importantly how does this ban affect me? In this paper I will discuss both sides of the story and come to a conclusion as to whether it is in our economic interest to legalize marijuana.

To begin we must look at the implications on supply and demand of marijuana at this time. Currently marijuana is illegal to use and is punishable by law, this makes it more risky to be a supplier and producer of this good, thus driving the price up; because of this specialization it will drive the supply down while cost goes up. If marijuana were to be legalized it would make a market that has extremely low barrier entries and start-up costs. This perfect competition would make it possible for supply to go up substantially thus bringing the price down.

Now that we understand the effects of supply and demand, we need to look at the consequences this battle on marijuana is having on our governmental budgets. There were over two million plus, marijuana related drug arrests in the year 2002. In Utah alone this will impact the police budget of 2002 with a staggering amount of 7.2 million dollars! As a whole country around 1.7 billion dollars will be used by the police to combat marijuana only. In 1998 it costs around $37,500 to imprison a person for one year [2].

So the question arises how we will compute a tax that covers external costs of this drug. The best answer is that marijuana consumption may impose costs on innocent third parties who do not consume it. According to standard economic theory, such "external costs" may be compensated by means of a harmfulness tax. Examples of external costs of drug abuse include increased insurance costs, accidents affecting third parties, and drug-induced violence and criminality. In principle these costs must be distinguished from "internal costs" that fall on the user, such as ill-health, reduced personal income, poor achievement, etc. Taking these external costs into account you would most likely tax the marijuana at around the same percentage as alcohol or tobacco. According to the National Institute on Drug Abuse [3], in 2004 over 14.6 million Americans over age 12 had used marijuana in the month prior to being surveyed and it tool belt.

We shall estimate the size of the commercial marijuana market by posing two price scenarios. Number one, given a $.50 excise tax and a minimum price of $1 per joint, we will assume that home growing absorbs 20% of consumption (that is, one-third of the consumption of multiple daily smokers), leaving a commercial demand of 12-24 million joints per day. This works out to about $2.2 to $4.4 billion per year in tax revenues. Number 2, given a $1 excise tax and a price over $2 per joint, we assume commercial consumption would be cut by 40% to 9 - 18 million joints, yielding $3.2 to $6.4 billion per year. We conclude that revenues from cannabis excise taxes might range from $2.2 to $6.4 billion per year. This is comparable to the revenues currently raised through the federal tax on alcohol ($8 billion) and cigarettes ($5 billion). Now these numbers are based off of 2004 user stats, I believe that marijuana use has increased since that time. In addition to excise taxes, states could also impose sales taxes on marijuana. Unlike excise taxes, sales taxes would be proportional to final retail price, including the added markup for premium brands. Just like alcohol, it can be expected that marijuana would often be sold for substantially more than its minimum price: in a hotel bar, a good joint might well go for $5. Assuming average retail prices of $ 1.50 - $2.50 per joint, and sales taxes between 4% and 6%, the total revenues raised might range from $200 million to $1.3 billion (based off of [4]).

As you can see the amount of money that the Government would make through taxation is enough reason to seriously consider legalizing marijuana. We have also looked at the costs of police and the judicial; system to stop marijuana users. Some may argue that legalization will increase drug use, like what happened at the end of the prohibition of alcohol. Although this result may happen when marijuana is first legalized, because of those who would normally never try this drug because of it was illegal would be more open to purchasing it. After the initial demand was up, it would begin to go back down and supply and demand would go back to normal like any other product like cigarettes or alcohol. This legalization would also take the money out of the hands of drug cartels and help slow down crime as a whole. That is why I believe it is in the best interest of our society to legalize marijuana. Do you need a tool belt?

1. http://www.usdoj.gov/dea/agency/staffing.htm

2. Drug Text International, International Foundation on Drug Policy and Human Rights, database (1998).

3. http://www.nida.nih.gov/

4. Miron, Jeffrey R. The Budgetary Implications of Marijuana Prohibition: Harvard University, 2005.