Final Paper
Analyzing impacts of marijuana legalization on the original illicit marijuana markets
Xu Shuangyi
1002952
Dec 2018
Abstract
In this essay, we discuss the potential effect of marijuana legalization on the original illicit marijuana markets which mostly located in Mexico and other countries that export a significant amount of marijuana to America for recreational use every year. A main question in the debate regarding the legalization of marijuana in some states in America is whether it will put cartels that produce marijuana flowing in the original illicit markets out of business. As the information regarding marijuana price and consumption is limited, it’s hard to fully explore how average consumption among existing users will change in response to changes in price and legal risks. We consider different sources of marijuana production, enforcement risk, decriminalization and other legal risks when discussing this topic. Taking all these factors into account, it is clear that there will be a significant decrease in marijuana sales in original illicit marijuana markets in the long run due to the legalization of marijuana in some states have given rise to the production of domestic high-quality marijuana. However, in the short run, there may be no noticeable change in marijuana sales in the original illicit markets.
1. Introduction
A vast literature has developed over the past twenty years since marijuana legalization has been implemented states after states in America, examining the potential effects of marijuana legalization on the original illicit marijuana markets. The economics literature, in particular, has focused on examining how changes in prices for marijuana of different qualities can influence the original illicit markets. There is a huge difference in price for marijuana of different potencies. Domestic marijuana that is produced within the U.S. is considered high quality while cannabis that is imported from other countries is considered low quality, sometimes referred to as ‘ditch weed’. As legalization of recreational use of marijuana is expected to significantly influence the monetary price people have to pay to obtain domestic marijuana, as previously with the prohibition, there is a black market risk premium that is added to the cost of providing domestic marijuana to the market and this risk premium will no longer exist. So, with the expected decline in the price consumers have to pay for domestic marijuana, how it’s going to affect the original illicit marijuana markets that are heavily depending on trading cannabis of lower quality?
To break down the problem for analysis purpose, as marijuana that is imported from foreign countries is mostly low-quality cannabis, the changes in consumption of imported low-quality marijuana can be viewed as a representative of the most important aspects that the original illicit marijuana markets have been influenced. A further assumption we are going to make is that, before the legalization of recreational marijuana in some states in America, the main source of recreational marijuana is through black markets which sell mostly low potency marijuana imported from Mexico and other countries. In this case, we can adopt the use of demand/supply curve and price elasticity to examine how consumption of low quality imported cannabis might change in response to changes in prices of domestic high potency marijuana as its substitutes when all other factors are held constant. The demand/supply curve is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labour or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted. The price elasticity of demand is typically used by economists to describe how consumption changes in response to a change in the price of any good or service. In particular, it tells you the percent change in consumption associated with a 1% change in price, and is derived by examining small changes along a single market demand curve. Market demand curves represent the aggregation of individual choices of quantities of the good consumed at various price points that could be observed in the market, holding all non-price determinants of consumption constant. Examples of non-price determinants held constant include the legal risk of consuming a good, other non-pecuniary aspects of the cost facing buyers – such as time it takes to search for the exact product they want, income of the consumers, and the prices of alternative products that could be consumed instead. So estimates of the price elasticity of demand for marijuana, like those for any other good or service, are valuable for examining what impacts a decrease in price of domestic high-quality marijuana will have on consumption of low quality imported marijuana, or furthermore, on the original illicit marijuana markets when all other factors are held constant.
Limitations with using demand/supply curves and price elasticities to examine how consumption of low quality imported cannabis will change with implementation of a policy like legalization are: First, a lack of precise information regarding prices of marijuana of different potencies and different countries of origin, which makes it hard to generate an aggregate market curve for marijuana consumption. Second, when we are evaluating the changes in consumption using demand/supply curves and price elasticity, we need to assume that all other factors are held constant. However, in the case of legalization, the changes are not just in the monetary price of the good but also in other factors, including the legal risk associated with using marijuana, the perceived health risks associated with use, and the social norms regarding the appropriateness of using marijuana for recreational purposes. Hence making it less accurate when we evaluating the changes in consumptions of low quality imported marijuana using demand/supply curves and price elasticities.
2. Analysis based on data and the adoption of supply/demand curve
For data shown in table 1, the economic literature typically defines “regular users” as individuals who report use on at least a monthly basis (so reporting that they used some positive amount in the past 30 days or at least 12 times in the past year). Clearly, this is a very inaccurate measure of regular marijuana users, as this could easily capture new initiates as well. However, nationally representative data provide no more reliable definitions that can be systematically compared across states or countries. Importantly, regular users also get defined by specific age group, as epidemiological data consistently demonstrate that regular use of marijuana peaks during young adulthood.
Negative elasticities values in the table below indicate that whenever there is an increase in the stated policy, there will be a decrease in marijuana consumption correspondingly. We can easily tell from the table that price elasticities from all studies for monetary price are negative values, indicating that if the prices for recreational marijuana increase, there will be a fall in marijuana consumption accordingly. Since all the studies conducted in the table 1 are roughly before the implementations of legalization of recreational marijuana in some of the states in America, we can assume that these are the price elasticities for imported low-quality cannabis. Prevalence estimates suggest that a 10% decline in price could lead to a 2.4 to 2.5 percent increase in rates of use among regular users. Full consumption effects, in terms of level of use, may even be larger, as indicated by the full demand elasticities.
Considering other policies, we can see that penalties and enforcement both appear to have negative elasticities or no effect/insignificant in some studies conducted. We can infer from the table that, an increase in penalties or enforcement will result in a decrease in consumption of marijuana. However, decriminalization appears to have positive elasticities in the study ‘Suffer and Chaloupka(1999)’. This implies that when there is an increase in decriminalization policies, the consumption of marijuana will increase accordingly.
In this case, considering imported low potency marijuana and domestic high potency marijuana as substitutes for each other, we can analyse the potential changes in consumptions for imported low-quality cannabis by putting these two kinds of marijuana’s supply/demand curves into separate graphs and draw connections between them. First, we consider the cost for these two different kinds of marijuana, since their costs play a crucial part in deciding theirs’ prices. Here we use S1 to represent the supply curve for domestic marijuana before the legalization of recreational marijuana and S2 to represent the supply curve after the legalization of recreational marijuana. D is used to represent the demand function for recreational marijuana, it has a negative slope which satisfies the negative price elasticities stated in the table above. As all the fixed costs for these two kinds of marijuana remain the same, after the recreational use of marijuana is legalized in some states, the taxes on domestic producers become lower comparing to foreign producers as a recent report by drugpolicy.org said, "Since 2010, marijuana possession charges (not including Denver) are down nearly 80 percent, marijuana cultivation charges also dropped nearly 80 percent, and marijuana distribution charges are down over 97 percent." Other than taxes, domestic producers have no additional shipping costs and legal risks associated with producing marijuana as it’s legalised. All these factors may result in a decrease in the price of the domestic high potency marijuana, according to graph A, if the price of domestic high-quality marijuana moves down from P1 to P2, we can see that the demand for domestic marijuana increases from Q1 to Q2. Here we assume that marijuana users will always prefer high-quality marijuana to low-quality ones and neglect the amount of people that newly start to use marijuana after legalization. Then as the price for high-quality marijuana is decreasing, the price of marijuana will meet more and more people’s maximum amount of money they are willing to pay for marijuana and consumers will constantly move from consuming lower quality imported marijuana to consume higher quality domestic marijuana. Hence there must be a decrease in the demand of imported low-quality marijuana as shown in graph B, which will result in a fall of low-quality marijuana entering US across the border. Additionally, consider black markets that are out of the states that marijuana is legalised, marijuana produced in states that marijuana is legalised may flow into other states as black markets. If we take Colorado as an example, it has ramped up its production, creating much more weed than residents actually need. That means some of those supplies are filtering out to other states on the black market. Even though it will still be some years before supplies from states where marijuana is legal will make up a large portion of the nation's black market, this will still result in overproduction in the original illicit marijuana market.
Graph 1: Supply and Demand curves for Domestic/Imported Marijuana
However, some people argue that, there may be a couple of offsetting effects and considerable uncertainty as of yet since only less than 5 percent of the U.S. population lives in places that have legalized marijuana for nonmedical use. Even in the short run, the amount of domestic marijuana that flows from states that marijuana is legalized to other stated as black markets is not significant, but our analysis implies that it will definitely put those cartels running the original illicit marijuana markets out of business in the long term if they don’t make any strategic changes. In this case, it’s just a matter of time for domestic marijuana to take a significant market share of the illicit marijuana markets.
3. Discussion
As the cartels running the original illicit marijuana markets may be slowly go out of business as domestic marijuana is taking up more and more markets shares. Marijuana may slowly become another common commodity and in this case, consumer’s behaviour will be no different from their behaviour when they are purchasing other common commodities like vegetables or fruits. Consumer will normally not consider its’ country of origin when they consume the goods. Even though in the short run, the original marijuana markets may not be affected much but in the long run, if imported marijuana remains low quality and since it’s still associated with severe legal risks, it may definitely slowly lose it markets shares. Domestic high potency marijuana has the tendency to becomes cheaper after legalization has been implemented and considering there is no additional cost like shipping from foreign countries and its’ taxes are much lower, the competency of domestic marijuana will keep increasing as legalization of marijuana taking place in more states. Possible strategies that foreign cartels should take in the long run is to raise their marijuana’s competency since there is noticeable difference in quality between domestic marijuana and imported marijuana. They can try to keep up with U.S demand by producing more high-quality marijuana. Other potential impacts we may infer from other studies are: First, legalization of recreational marijuana can lower the crime rate in America. A 2014 report by The New York Times states that, "Criminal marijuana cases in Colorado plunged by 65 percent in 2013, the first full year of legalization for personal recreational use." Second, there may be a significant rise in tax income for America as legalization of marijuana taking place in more states. A strong evidence for this is: Colorado has made more than $100 million on marijuana taxes, licenses and purchases since legalization in 2012.
4. Conclusion
The literature just reviewed demonstrates several possible impacts on the original illicit markets after marijuana is legalized in some states in America. First and foremost, while a growing literature has developed analysing the impacts following a variety of disciplines including sociology, psychology, epidemiology, criminology, and economics, all emphasizing different factors that are important for influencing the original illicit marijuana markets, very little work carefully considers the impact of economic variables on the level of imported low-quality marijuana consumption.
Second, while changes in the monetary price of marijuana may be important for understanding how much consumption for imported low-quality marijuana will change, other aspects of the change in policy including the reduction in the legal risk of using and perceived harm of use, will also be important predictors of how much consumption actually changes. Thus, models attempting to project the impact of a change on consumption associated with legalization must make assumptions regarding the anticipated change in perceived norms and harmed in addition to assumptions regarding the change in price and legal risk. Ignoring these factors is an acceptable approach when making estimation on consumption.
Third, evidence presented here suggests that the consumption of imported low-quality marijuana could change in a response to changes in domestic marijuana’s price. As stated in the analysis section of this paper, the elasticities shown suggest that for every 10% decline in the monetary price of marijuana, there will be an increase of 3 to 5% in marijuana consumption. All these indicating that as the price for domestic high potency marijuana decreases due to legalization of recreational use of marijuana, cartels that dominating the original illicit marijuana markets may slowly go out of business. However, in the short run, as the population in states that marijuana is legalised only account for a small part of the total population that use marijuana recreationally, there may be no noticeable changes in the original illicit marijuana markets. Others potential impacts may include a decrease in crime rate and a significant rise in national tax income.
5. References
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