Economics of Marijuana Legalization

I’ve got a column up on the site about how true marijuana legalization—as opposed to Netherlands-style tolerance—could make pot trivially cheap, something like a few cents for a joint. One takeaway from that which I get into is that this means there’s a lot of scope for pretty hefty taxation of legal marijuana.

A few people who’ve read it said I should have delved into the possible fiscal benefits of reduced enforcement costs. I actually avoided that for a specific reason, namely that you have to remember that under some new regime there would still be enforcement costs. Alcohol, for example, is legal in the United States. But we still have tons of alcohol regulations and tons of enforcement of those regulation. Between drunk driving arrests, liquor license public hearings, tax collection, and all the other banal humdrum regulation of a basically legal substance you’re still looking at a huge bill. So as long as we assume that we’re not talking about making pot a totally unregulated substance, the level of enforcement costs is basically a matter of choice. Just like today there would be a bunch of rules on the books and a lot of violation of those rules and then different jurisdictions would have to think about how much they want to invest in trying to stop those violations.

The really big change here really is that genuinely legal pot could be produced in much more efficient ways than current illicit pot. The resulting economic surplus would then get divided up between the government (through taxes), producers (as profits), and pot smokers (as a cheaper high) with some inevitable spillage due to tax evasion if you try to make the tax really high.