The economics of (sea)weed

Unlike Mark Twain’s experience with New York, returning to Washington D.C. after an absence of a mere six months in April I found quite of bit of moral decadence: Cannabis had been legalized. To my chagrin, only its consumption, but not its sale, was allowed.

Interestingly enough, economists and the public-at-large differ a lot on their approach to legalization of marijuana and other similar “soft drugs.” The former are generally against prohibition based purely on basic economic theory, whereas a non-economist’s stance will depend on his or her political views.

The Initiative on Global Markets, a research and thought platform of the University of Chicago’s Booth School of Business, asked its panel of academic experts whether they would agree with the following statement:

“The Netherlands’ restrictions on soft drugs combined with a moderate tax aimed at deterring their consumption would have lower social costs than continuing to prohibit use of those drugs as in the U.S.” All strongly agreed or agreed.

The social costs refer to the drug-related crime and policing costs - as well as the health effects and accidents as a result of drug use. These pros and cons are summarized in a 1995 economic survey paper. Opponents particularly argue that legalization would increase consumption, especially among the young. In fact, several on the panel have noted that consumption would probably increase.

However, consumption may increase much less than the number of new users, as 80 percent of marijuana expenditures in the U.S. are made by just 20 percent of users - those who smoke pot daily. Most others would be first-timers, or those looking to get stoned on special occasions. Hospitals in Colorado and Washington, where sale of marijuana has been legalized, have already seen many of those. So it may be safe to assume that demand for pot is rather inelastic to price.

In a 2004 paper, the late Gary Becker, who revolutionized economics by writing on topics like racism and love, argued with his co-authors that “when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value.” They also showed that “a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement.”

Besides, as Turkish economist Daron Acemoğlu, one of the experts, notes, “the U.S. war on drugs appears to be a total and very costly failure,” and so it may be time to try something new. However, it is important to realize that we are in uncharted territory here. The overall impact would depend on the answer to many empirical questions such as whether cannabis is a “gateway” to hard drugs.

Even if you managed to estimate all the effects, valuing them would depend on how much society cares about the harms of drug use, effects on crime, policing efforts, tax revenue and many actor factors.

Economist Stephen Pudney summarizes these complications in a 2009 lecture. And even if the conclusion is for legalizing pot, there are many other issues that need to resolved, as discussed by RAND Drug Policy Research Center co-director Beau Kilmer.

I will be looking forward to reading his book, “Marijuana Legalization: What Everyone Needs to Know” over some weed (Japanese seaweed, of course, what else?) at the 2016 IMF-World Bank Spring Meetings in April.