An Analysis of the Economics of Drug Policy in the United States PAPER

An Analysis of the Economics of Drug Policy in the United States

Sam Redel

George Mason University

            What we now consider to be illicit substances gained negative attention in the early 1900’s when business interests and Religious values inappropriately mixed with legislative policy. Cannabis, along with Hemp was criminalized in 1937 by the Marijuana Tax Act. Marijuana is the most Common illegal drug and will be my focus; however, the economics applies to all drugs. Estimates of dollars spent by the government on the war on drugs hovers in the tens of billions, while some of this is spent on treatments and prevention, which I think is efficient, most of the money is spent on interdiction and aggressive law enforcement.

First we must understand the nature of the Demand curve for Marijuana in order to understand how the Governments method of fighting it is misguided. Marijuana is a relatively Inelastic good. Meaning that changes in the price of the good do not yield significant changes in the quantity demanded. How do we know? 1) It is a necessity for many- Marijuana is not a physically addictive substance like heroin or cocaine, but it is a lifestyle for some, something that helps you relax and get a good night’s sleep, or help stimulate your appetite. 2) The cost is a small percent of income- Many can make the case that marijuana is expensive but let’s do the math. We will assume the income of a low skilled member of the labor force making slightly above the federal minimum wage, so making $8/hour at 40hrs/week they receive an income of around $320/week. Let’s assume they purchase an eighth of an ounce of Cannabis per week at a cost of $50. This represents only 15% of their income, and depending on the utility received by that user, $50 or 15% of their income is a rational opportunity cost. 3) No substitutes exist for Marijuana- Cannabis delivers a “high” to users that they cannot find anywhere else, no other substance, illegal or legal can make people feel the way they do when using marijuana. Very few people would disagree with that statement. Why else would it be so popular? 4) It is used for a very short period of time- People don’t save Marijuana for a long time, ask any user and they will tell you it gets used almost as quick as it’s bought.  In conclusion we are left with a sharp downward sloping demand curve for marijuana.

Government intervention into the market for marijuana comes in the form of Interdiction, DEA , State, and Local officials use valuable resources provided by tax payers to go after dealers, cutting off users on an exponential scale.  But some staggering statistics show that this has not been implemented efficiently. In 2011 757,969 people were arrested for a marijuana related violation, of the 757,969, 663,032 (86%) according to the Drug policy Alliance, were only minor possession charges. Assuming it costs roughly $30,000 to house an inmate for a year, that is $20 billion per year spent by Municipalities and States to house people convicted of victimless crimes. The DEA had a FY 2012 budget of a little over $2 Billion, according to the DEA budget report by the Justice department,  this very large scale effort by the government uses up scarce resources, is seen in the demand curve as we move from S1 to S2. Billions of dollars spent to fight the war on drugs can be visualized by the decrease in the supply curve of drugs. This shift causes a decrease in the quantity of drugs, shown by a shift from Q1 to Q2 and an increase in the price for drugs shown by the shift from P1 to P2. But because the demand curve is inelastic, a decrease in supply will bring a higher price compared to a relatively small decrease in quantity.

So now in the short run we find that there are less drugs out there, and prices are much higher. But because people will still buy drugs regardless of the price, they still demand pretty much the same amount. Who does this help and who does it hurt? Well first of all it helps violent drug organizations outside the country “Processed cocaine is available in Colombia for $1500 dollars per kilo and sold on the streets of America for as much as $66,000 a kilo (retail). Heroin costs $2,600/kilo in Pakistan, but can be sold on the streets of America for $130,000/kilo (retail)” (Zill, O., & Bergman, L. (n.d.) So if a couple guys in the Jungles of south America can produce one kilogram of cocaine for $1,500, and then the organization they are working for is able to get it to American they can charge a higher price on the good that they are still only producing for $1,500. Certainly it is not an intension of the government to help drug organizations, but it is a consequence.

While keeping Marijuana illegal the Government is helping a number of groups, Hemp is a product of marijuana and has a number of very useful applications that could make some materials obsolete, thus competing with certain influential manufacturers. According to a Congressional Research Service document, “Some estimate that the global market for hemp consists of more than 25,000 products in nine submarkets: agriculture; textiles; recycling; automotive; furniture; food/nutrition/beverages; paper; construction materials; and personal care” Also, consuming Marijuana is good for many ailments, which could compete with large drug manufacturers who have a lot of pull in public policy. Medical Marijuana has gained strength as something that can treat many symptoms but is still not very accepted socially. So far, inertia has had its toll on the lack of public policy reform surrounding marijuana even regarding things like Hemp and medicinal utilities from cannabis.

What if we legalized marijuana and set up a distribution/tax system similar to alcohol? First we need to consider what would happen if Government got out of the way of marijuana production/distribution, and the price was allowed to naturally arrive at equilibrium. Groups competing freely without any threat of legal action would compete and naturally bid down price, this is basic Supply and Demand. I looked to a study done by The Frasier institute, “the average price of 0.5 grams (a unit) of marijuana sold for $8.60 on the street, while its cost of production was only $1.70” Moffatt, M. (n.d.) At a profit of $6.90 this would allow for a market equilibrium to emerge obviously, and though I am not a proponent of disrupting a healthy equilibrium by taxing, of course tax revenue would be a big reason for the Government to allow this in the first place.

To make some estimates we assume an environment where people cannot be prosecuted for production of marijuana and where the government has an efficient system where they can tax it. Also assuming that competition among firms has brought the equilibrium price to approximately $2.00/0.5 grams, additionally we can use $1.00/0.5 grams as the tax imposed, (this is very arbitrary, and some argue that the tax should be the entire consumer surplus). Now in this crudely designed scenario a consumer would be purchasing a half a gram for around $3.00, and the government would be gaining $1.00/.05 grams. A good consensus on marijuana consumed annually in America hovers around 8,000-10,000 metric tons. Let’s say that because of the increase in cultural acceptance due to legalization, we are consuming 11,000 tons, 11 Billion grams and $22 Billion in revenue. There are many calculations and different scenarios but this is just one example. Of course because the demand curve for marijuana is Inelastic we still have a relatively high consumer surplus that I am sure the government would love to take advantage of.

Either policy makers have the interests of corporations/law enforcement ahead of citizens (and the government itself), or officials inside the beltway don’t understand the simple Supply and Demand function that I explained and are politically incapable of pursuing reform. Whether the former or latter is true I would propose the legalization of Marijuana (not cocaine or heroin). This would involve government opening up marijuana cultivation to free entrepreneurship and imposing a tax on it, paired with a dramatic decrease in the tens of billions spent by the Federal Government and Municipalities on the war on drugs. However, I do support the roughly $10 Billion spent on prevention and treatment annually between State, Local, and the Federal government, according to Drugwarfacts.org. This is a service that needs to be provided to addicts of addictive substances like cocaine and heroin, who are not functioning members of society because of drugs. I do understand how difficult it is to reform a policy that the Government has been committed to for a long time and dumped a lot of resources into. If we Taxed marijuana, and cut spending on interdiction it would be safe to throw around numbers approaching $100 Billion in revenue annually. The Economic logic is being recognized by states like Colorado and Washington, but policy makers on The Hill need to make sensible reform especially when we are faced with a growing debt to GDP ratio with no end in sight, and a drug war where we can’t admit defeat and continue to lose.