Science & Technology

A look into the economics of cannabis legalization

With cannabis as the most popular illegal drug worldwide, the recent increase in legalization has sparked discussions among economists. Upon analysis of legalization, impacts on crime and violence, drug consumption, and taxation, there have been calls for a review of the cannabis market and its reformation policies by governments and industry experts alike. 

Should governments fight legalization policies, or do they assist with reducing the influence of the black market? Can the legal market compete with the black market? These questions are addressed in “Weeding Out the Dealers,” a paper published in the Journal of Economic Behavior and Organization. 

In this paper, Tiffanie Perrault, a postdoctoral researcher in economics at McGill, examined several policy goals, recent legislative reforms, and the outlook of the cannabis market in Canada. Perrault is also dedicated to studying the different ways the legalization of marijuana can be implemented to pave the way for a future of regulation and reform. 

From a public policy perspective, legalizing and taxing cannabis can bring in a new source of revenue. Looking to the US, the state of Colorado collected USD 325.1 million of tax and fee revenue in 2022, and the state of Washington collected USD 515.2 million in the same year. 

According to existing research, policies controlling drug use through taxation are more efficient than prohibiting the drug. Overall, prohibition fuels violence, high incarceration rates, and racial discrimination while stretching law enforcement resources thin. In contrast, in the US and Canada, legalization leads to a decrease in overall criminality and generates tax revenue but at the cost of increasing overall cannabis consumption. 

The primary focus of Perrault’s research is on legalization and taxation, and how the legal market can start to overtake the black market. 

“In order for the legal retailers to actually compete against the black market, they need to introduce more competition,” Perrault explained in an interview with The Tribune. “You need [a] quality dimension, and the other important aspect is risk.” 

The researchers broke consumer behaviour in relation to the cannabis market into five areas, for instance risk aversion, attention to legality, and reactions to price differences. 

Furthermore, Perrault discussed a strategy to fight against the black market by reducing its ability to compete with the legal one. 

“The idea is that you want the black market not to be able to compete anymore, so you want to push their price down to the marginal cost,” Perrault explained. 

By forcing them to lower their prices, the black market’s profitability and competition will diminish significantly. Based on the article’s model, by not repressing illegal providers, we allow them to compete fiercely and push the price of cannabis down, increasing consumption of illegal cannabis post-legalization by 64 per cent. 

Despite the introduction of new reforms, Perrault noted that the black market will always respond strategically to keep their businesses alive. One mistake policy makers often make when rethinking cannabis policies is focusing solely on the price of products and neglecting their quality. 

“So, we need this improvement in quality, and then it enables you to raise the price [of legal cannabis]. And because you raise the price, you can control the increasing demand that is subsequent to legalization,” Perrault said. 

In the end, Perrault’s study highlights the relationship between legalization of high-quality cannabis and sanctions against illegal trade. Legalization will be effective at regulating the demand for cannabis if consumers are compelled to buy good quality, legal cannabis rather than uncertified illegal products, and, at the same time, if illegal suppliers are targeted by repressive measures that drive them out of business. 

With continuous efforts, governments will weed out the dealers of the cannabis market while curbing the legal demand for the drug by raising its price. 

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