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“The Costs and Benefits of Legalizing Marijuana” By Morgan Kimbarow
Introduction
In the 1960’s marijuana use was a shocking new facet of the counterculture movement.
People that were unfamiliar with the drug’s effect had the belief that it was dangerous and
perverted. It was highly stigmatized at the time but currently it is entrenched in mainstream
culture. Many countries including America have started to legalize marijuana. Many argue that
legalization would result in social and monetary benefits.
Proponents believe that the legalization of marijuana would decrease the government’s
budget by eliminating marijuana law enforcement. There is a huge expenditure of money spent
on enforcing marijuana laws every year. This is money that could be better utilized to enforce
and prevent violent and heinous crimes. This decrease in spending could potentially save the
states millions and the country billions. If funds are properly allocated and are wisely budgeted,
decriminalization may reduce debt and increase expenditure on local and federal projects that
will improve social welfare.
On the local level there are states whose economies suffer because of the prohibition on
marijuana. Alaska is a state that is in the lower tier of the United States in terms of their
economy. They are also one of the biggest consumer of cannabis products in the U.S. Lower
economic states can generate revenue by effectively taxing marijuana which will cause a raise in
GDP. Similar to the federal level, state governments like Alaska can increase government
revenue by taxing consumption.
There are many monetary benefits from legalizing marijuana but there are also many
social benefits as well. Although most cost benefit analysis(CBA) try to find benefits for all
parties involved, legalization could potentially cripple drug trade organizations. Countries like
Mexico are infested with cartels, these cartels illegally export marijuana into the United States.
These cartels murder, kidnap, and extort in order to net their profits. Consuming marijuana that
is produced by cartels is supporting their infrastructure and enabling them to continue their
trafficking. If U.S. states that bordered Mexico legalized marijuana it would cut out cartels and
drug trade organizations as middle men.This would cripple cartels, reduce profits, and potentially
save many lives.If marijuana was legalized and easily accessible it would eliminate the danger
inherent in obtaining the drug illegally. Consumers would feel safer when purchasing cannabis
products knowing they would not have to put their lives at risk.
California’s current debt is over $426 billion, this number is staggering to California’s
economy. There are two ways to potentially erase this debt; by decreasing spending and through
increasing taxes. The legalization of marijuana allows the opportunity for a brand new market to
commence. As new businesses open this will create new jobs and decrease the current
unemployment rate. There are many obvious and concealed benefits to ending marijuana
prohibition.
Literature Review
One of the first CBA’s I came across through my research was “The Economic
Implications of Marijuana Legalization in Alaska” by Scott W. Bates who is a principal
investigator of economic analysis and research. Bates does an excellent job of organizing his
research into easily comprehensible material. His first section looks at justice system costs and
how much the government spends enforcing drug laws. “Total arrests for marijuana offenses
averaged 1,233 annually, with most of them (1086) for possession and the remainder (147) for
sale or manufacturing.” (Bates) This also accounts for 6% of juvenile arrests. “Less than half of
all drug-related arrests nationally (45%) are for marijuana, as compared with 66% in Alaska.
Whereas 27.5% of arrests for sale or manufacture of a drug nationally are for marijuana, Alaska
has a much higher rate at 38.5%. About half of all drug possession arrests nationally are for
marijuana, whereas 73.4% of the drug possession arrests in Alaska are for marijuana.” (Bates)
Bates estimates that the total judicial system expenditure allocated marijuana prohibition totals
over $16 million.
Bate’s CBA of marijuana legalization in Alaska is neutral and presents his information
objectively. Bates sets out to clearly define prohibition and show how it can be effective when
used properly. Prohibition must drastically reduce consumption of the specific drug.,secondary
effects must be positive; e.g. that as a result of prohibition crime decreases, it must effectively
decrease substance abuse, lastly the monetized benefits that prohibition incurs.
Bates dwells more deeply into this definition to define the problems of prohibition, he
comes up with the following reasons why prohibition in Alaska failed. “1) Marijuana prohibition
creates a black market in marijuana rather than eliminating it. 2) Prohibition increases violent
crime by preventing black market participants from resolving their differences through standard
nonviolent mechanisms. 3) By raising the price of marijuana, prohibition encourages income-
generating crime such as theft, since additional income is needed to purchase marijuana. 4) In
black markets, participants must either evade law enforcement authorities or pay them to look
the other way, so the scope for corruption is substantial. 5) Making products illegal may make
them less safe. The United States experience with alcohol prohibition provides a classic example
of this effect: deaths from adulterated alcohol soared 6) Revenue is diverted from government
and law-abiding citizens to criminals. 7) Prohibition breeds disrespect for the law. 8) It
complicates or compromises other policy areas, for example, civil liberties and rights to privacy,
and international relations.”
Jeff Miron an economics professor at Harvard University, has had a lot to say about
marijuana legalization. He looks at decriminalization on a macro level to determine benefits and
costs. He understands that it is a hotly debated topic and does not expect change to happen over
night. Miron quantifies benefits for all 50 states and then quantifies it federally. Miron examines
tax revenue from legalization that would lead to increased spending to other numerous welfare
projects. He explains that legalization can not be quantified only through monetary profits and
that the problem must also be viewed socially as well. Social benefits must be properly analyzed
in an effective CBA. It is important to recognize benefits at the state level and understand how
they ultimately attribute to the federal level.
The “Economics of Cannabis Legalization” written by Dale Gieringer PhD attempts to
accurately tax marijuana consumption per ounce, gram, and joint (marijuana cigarette). This is
valuable information because it shows how drastic potential benefits were in 1994 and that they
still hold true today. This information is crucial because it helps consumers realize sales tax per
consumption amount. He calls this “harmfulness tax” and proposes that marijuana would be
taxed comparatively to tobacco and alcohol products. Gieringer makes mention of a potential
marijuana market that would create new jobs and businesses. Another way that Dr. Gieringer
shows benefit from legalization is by accounting for the profit from cultivating marijuana.
Although this is an older study the information is still vital because it provides a basis to
calculate benefits today.
There are many obvious benefits the United States can obtain by legalizing marijuana.
However an aspect that is constantly overlooked is how legalization may result in a decrease in
profits from dangerous cartels.There has been numerous problems over the years with cartels
from Mexico illegally exporting drugs into the United States. Marijuana accounts for a large
percentage of their illegal exports. “Reducing Drug Trafficking Revenues and Violence in
Mexico;Would Legalizing Marijuana in California Help?” examines the ramifications cartels
potentially incur if states that border Mexico legalize marijuana. This research does a good job
of applying social benefits to decriminalization. A usual goal for a CBA is to apply Pareto
Efficient principles, in this situation however a benefit is being taken away as a result of
legalization
Description of Data
This table is based on Jeff Miron’s research and it deals with the expenditure of marijuana
prohibition enforcement. The data is based on yearly projections. These numbers are composed
for each state, and are then calculated to derive a federal total. The first column is each state’s
police budget, these are the costs of enforcing marijuana. The second column is each states
judicial budget, this can be understood as court costs and lawyers fees. Third is the corrections
budget, this is the cost of housing prisoners who have committed marijuana crimes.
This table shows the potential state revenue from tax. The first column shows the use
rate this can be simplified to mean how much marijuana is smoked per population of each state.
The next column shows the total population of each state that consumes marijuana. The third
column shows the proportion of the total population of each state to the amount of marijuana
consumed. The fourth column shows the potential revenue for each state. It is important to note
that California has the highest number of users therefore they would have the highest tax
revenue. Legalizing marijuana in California alone would yield a higher profit then many smaller
states combined.
This table shows the revenue for cartels and drug trade organizations in 2005. The
biggest source of revenue from illegally smuggling into the U.S. is marijuana. It also constitutes
the largest share of revenue. Therefore if marijuana is made legal in states that border Mexico it
will help eliminate profits from the illegal drug trade. Legal states will now be able to legally
produce marijuana and there will be no demand to buy marijuana from cartels.
This table shows that there is a high amount of marijuana arrests in Alaska compared to the rest of the
United States. There is a big expenditure on enforcement of marijuana laws. There fore legalization will
reduce enforcement costs in Alaska. Alaska is one of the states that will greatly benefit from marijuana being
legalized because there will be a decrease in arrests due to marijuana and will result in government savings.
Since there is a high proportion of use in Alaska the total judicial budget is fairly high. In
terms of policing cost we can monetize this around the ballpark of $1.5 million. Legal and
Judicial fees will run around $9.45 million. The corrections (housing prisoners arrested from
marijuana laws) budget will be approximately $5.05 million. If legalized we can assume that
these costs will be mitigated to zero. As a result the $16 million saved could be used to fund
various social welfare projects.
It is difficult to determine all the costs from marijuana legalization since it hard to
monetize the effects of legalization. Gieringer places an external dollar amount per one joint
consumed. This external costs pertains to lost costs as well as illnesses from consumption.
According to the table there is potentially a high harmfulness cost from consuming marijuana.
This chart shows the economic benefits of cannabis legalization according to Gieringer.
What is interesting about this data is that it accounts for enforcement savings as part of its
benefit. Another fascinating component that table accounts for is the hemp industry. The hemp
industry accounts for tourism and new business that attribute to an improved economy through
out the United States.
Colorado’s marijuana use has increased since legalization. More people are consuming
marijuana in Colorado then any other state. This shows that there has been an increase in use as
well as increase in tourism due to the hemp industry. This chart can be used to estimate
increased marijuana use in states that legalize marijuana.Legal marijuana sales began in
Colorado 18 months ago. Since then, tourism is up 14 percent. (Vasilinda 2014)
(Rusche & Sabat)
NPV Calculations
NPV= -C0 + C + C2 + ….. (1+R) (1+R) C0=Initial Cash Investment C= Cash inflow R= Discount rate
Above is the formula I used for my NPV Calculations. It was difficult to find costs
associated with legalization because there were usually only benefits associated with legalization
however I was able to monetize some. The discount rate I held constant for all my calculations
was 0.250 ,the current American interest rate is 0.250 % (FED). My NPV calculations are all
based on a one year projection. Overall I found this formula to be simple yet effective in
determining proper effective values for my data.
The information I used derived from Miron’s data. The state and local benefit from
legalization is $5.3 billion. The benefit at the federal level is $2.4 billion. If marijuana is taxed
at the rate of all other goods there is an additional benefit of $2.4 billion. If marijuana is taxed
comparable to alcohol and tobacco there is an additional benefit of $6.2 billion. If marijuana is
taxed like all other goods the total NPV calculation for one year is $8.08 billion. If marijuana is
taxed like tobacco and alcohol the total NPV calculation for one year is $11.12 billion.
The next NPV calculation I ran was based on Bate’s data from his CBA of legalization in
Alaska. I calculated two NPV’s one for prohibition and the other for legalization. If legalized
the cost of expenditure is immediately erased from $24 million so I counted this as a benefit.
There was an additional cash flow of $12 million accounted by potential revenue from tax.
There was also another cash flow of $35 million, this was potential revenue from a 2%increase
in tourism. Overall the one year NPV calculation was $56.8 million as a result of legalization.
The NPV for prohibition started off with prohibition costs that included law expenditure, the
total cost was $24 million. There was also an additional cost of $8 million, this accounted for the
impact on family, lost economic output, and secondary justice system effects. Overall the one
year NPV calculation of prohibition is -$25.8 million annually.
I again ran two NPV calculations while examining the profit cartels make from drug
trafficking. The cash flow for cartels is $8.57 billion from marijuana, $3.96 billion from cocaine,
$1.02 billion from meth, and $0.34 billion from heroin. In the prohibition model all of the cash
flows were added up and discounted for a total net present value of $11.12 billion. In the
legalization calculation I added all of monetized inflows minus the benefit from marijuana, this
total profit for the cartels would end up being $4.26 billion.
The last NPV calculation I ran was the total benefit of the United States legalizing
marijuana. I used my data from Gieringer’s research However this NPV calculation accounts
for the added benefit of the hemp industry to include tourism and other profitable business
attributing to the federal profit comparable to increased tourism rates in Colorado. I was able to
come up with a cost of legalization by monetizing the harmfulness cost per “joint” (marijuana
cigarette) consumed. The total profit is as follows $6.4 billion in excise tax, $1.3 billion in sales
tax, $9 billion in enforcement savings, and $10 billion in hemp industry/tourism. Assuming the
mean consumption of all daily users is two or three joints per day, current national consumption
can be figured to exceed 7 to 10 million joints per day, or 1200 to 1800 metric tons of 6% THC
cannabis per year. (Grienger) Compared to Colorado’s chart there was a 72% increase in
marijuana use so if 7 million joints were assumed during prohibition legalization would increase
use to 12.04 million joints per per day. Using Griengier’s model of $0.40 external cost per joint
this equals an annual external cost of $1.76 billion. The one year NPV calculation for the United
States would be $21.21 billion.
Conclusion
Legalizing marijuana has been a hotly debated topic for some time. There are obvious
benefits of legalization that can be monetized. On all levels marijuana is beneficial and can
drastically increase state and federal income. That is why marijuana must be legalized. The U.S.
continues to put themselves at a disadvantage because they are preventing the country from an
enormous amount of tax revenue. By continuing prohibition the country denies itself taxable
revenue.
Marijuana when used properly has many medical benefits. When it is abused though it
can cause unsatisfactory performance in daily life tasks. That is why it should be taxed
comparable to alcohol and tobacco, items that have obvious detrimental qualities. If legalized
and taxed properly the tax revenue could be tens of billions of dollars. Not only is this money
saved and decreasing debt but it can be used improve the economy by creating new projects..
This is money that can be spent enforcing laws and preventing dangerous crimes.
In certain states like Alaska it is difficult to improve the state’s economy. Alaska has an
increased amount of marijuana use and crimes compared to other states. If this consumption is
taxed and the expenditure on marijuana laws is eliminated it will improve the state’s economy.
Alaska can also benefit from added profits from tourism if the rate of visitors is increased to a
rate comparable to Colorado’s. If marijuana is legalized in Alaska it will increase GDP and
improve the economy
Marijuana legislation also affects countries like Mexico that borders the United
States.Marijuana legalization affects violent drug organizations that make their money trafficking
illegal drugs. Their main revenue source is marijuana which accounts for 61.7% of their
revenue. If marijuana is immediately legalized the profit margin for the cartels is immediately
cut in half. Legalization will cripple the ruthless and murderous cartels.
Marijuana can be beneficial in many capacities. I believe that it is only a matter of time
before it is finally legalized. Marijuana is less stigmatized then it ever was before so this will
cause people to reevaluate its legality. Legalization can amount in huge profits on the state and
federal level. I propose that the United States immediately begin active legislation to legalize
marijuana throughout the country.
References
Bates, Scott. The Economic Implications of Legalization in Alaska. Boreal Economic Analysis and Research, 2004. Web.
Crites-Leoni, Abbi Medicinal Use of Marijuana: Is the Debate a Smoke Screen for Movement Toward Legalization? 19 J. Legal Med. 273, 280 (1998) (citing Schwartz, et al., Short- Term Memory Impairment in Cannabis-Dependent Adolescents, 143 Am. J. Dis. Child. 1214 (1989).
Gieringer, Daniel. Economics of Cannabis Legalization. NORML, 1994. Web.
"FED Federal Funds Rate, American Central Bank's Interest Rate." Federal Funds Rate FED. N.p., n.d. Web. 09 Dec. 2015.
Kilmer, Beau, Johnathon Caulkins, Brittany Bond, and Peter Reuter. Reducing Drug Trafficking Revenues and Violence in Mexico. Rand Corporation, 2010. Web.
Miron, Jeff. The Budgetary Implications of Marijuana Prohibition. Harvard University, June 2005. Web.
Rocky Mountain High Intensity Drug Trafficking Area. “The Legalization of Marijauna in Colorado: The Impact.” Volume 2, August 2014.
Rusche, Sue, and Kevin Sabet. "What Will Marijuana Cost Employers?" 2014: n. pag. Print.
Vasilinda, Mike. "Tourism, Tax Revenue up in Marijuana-friendly States." News4Jax [Denver] 4 Aug. 2015: n. pag. Print.