Marijuana legalization is about demand, supply, market structure and cost benefit analysis.

An Economic High?

Nov 25, 2012 • Demand, Supply, and Markets, Economic Debates, Government, Households, Innovation, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 169 Views    No Comments

On November 6, Colorado voters resoundingly agreed that recreational use of marijuana would become legal. However, as Colorado Governor John Hickenlooper said, “…federal law still says marijuana is an illegal drug so don’t break out the Cheetos or goldfish too quickly.”

Colorado does already have a medical marijuana industry. With hundreds of dispensaries in the state, an entire industry has blossomed that creates jobs and feeds municipal coffers considerable tax revenue. Near Denver, marijuana is grown in a million square feet of warehouse space while firms like Dixie Elixirs & Edibles produce products that include marijuana infused fizzy drinks and truffles.

So imagine, similar to micro-brewed beer, having legal recreational marijuana will mean different brands of cannabis as well as an array of branded marijuana products ranging from hot dogs to olive oil on store shelves. Moving from medical to personal use will just expand the marijuana industry’s economic impact.

Others, though, are quick to point out the downside. When firms grow, large profits will depend on heavy users. Meanwhile, as this Huffington Post headline reminds us, “Marijuana Users Feel Less Dedicated to Work, Shocking Report Finds.” Essentially, in addition to cigarettes and alcohol, we would be establishing a third legal “vice industry.”

Our bottom line? Legalizing marijuana will probably increase demand while our price elasticity will determine our response to the price change. On the supply side, a competitive market structure will evolve that starts as monopolistic competition and then becomes oligopolistic as firms grow.

A Final Fact: It is currently tough to borrow money from a bank to expand a marijuana related business because of the federal/state conflict. For example, how will the IRS respond?

Sources and Resources: With transcript and audio, this Terry Gross NPR Fresh Air segment provides a perfect summary of the issues surrounding recreational marijuana legalization. Then, this 60 minutes segment shows the warehouses, the people, the products. To read about the 25-year marijuana study, here is the Huffington Post article.

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