February 27, 2009

Legalizing Marijuana: The end of all our economic problems?

California is trying desperately to push through a bill that would allow people age 21 and up the legal right to smoke marijuana. The Board of Equalization estimates that it will bring in 1.3 billion dollars every year and help California out of a huge pile of debt. If only our government could learn how to spend our money more wisely, then maybe they would not need to continue taxing everything they can get their hands on… even illegal substances.

However, this is very unlikely, so we are stuck analyzing the economical implications/rewards of legalizing pot. First of all, an increase in tax revenue will most likely not bring the state out of debt, no matter how much revenue is made. A basic concept in economics lies behind the demand of a market. When people have more money they tend to demand more goods and services, thus maximizing their utlilty. This is proven true also by our government’s reckless spending that only increases with tax hikes. For instance, part of the revenue brought in my legalizing marijuana will be spent on rehabilitating the drug addicts that it is predicted to create. Whereas, the people might benefit from the government injecting these tax dollars into the economy, in all actuality, California will likely remain in debt.

Still, people in many ways will be better off, which is after all the underlying point of economics. Potentially, many jobs will be created, prisons and the courts will be less crowded, and the government will be able to inject money back into the economy. Health risks are, for the most part, pointless to debate, since hundreds of thousands will smoke marijuana whether it is legal or not. Violent crimes could possibly be lowered due to a fall in dangerous black market dealings as well. Although the argument will probably made that this is the ruin of moral society as we know it, I see it as just one more thing the government can no longer tell the people not to do, which is ironic, since people are smoking without their consent anyways.

There is one other point made on the new legislation that needs examining. The bill puts a $50.00 fee on the sale of marijuana per ounce. Where this arbitrary number came from is not clear, but the negative implications could be endless. Since it is ridiculous to believe that all the drug dealers operating on the black market will shut down shop and instead allow the family owned gas station down the street to take all their business, there is still going to be a black market for weed. Especially if the $50.00 imposed fee turns out to be a price ceiling or a price floor. My guess is that this price is going to be a floor, since the government is interested in maximizing profits, they will set this as the minimum amount allowed to be charged to buyers. Selling below this price will be illegal. This will allow the black market to continue selling cheaper marijuana, undermining the government’s prices. If the $50.00 price is above the equilibrium price of the market for marijuana, then there will be a surplus of the quantity supplied by the government. If people can get cheaper marijuana illegally they probably will since they have been all this time anyway. This will reinforce the black market instead of weakening it. Either way, an imposed legal price disrupts the rationing ability of the free market. If the government really wants to maximize their profits, they should stay out of the markets way.

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