2/24/2015

Marijuana Laws - Baked Alaska

The Economist just published this article on the legalization of marijuana in Alaska. I figured this would be an interesting and controversial topic relating to economic principles. According to the article, Alaska has some of the highest rates of marijuana use in the country. It states that the farther way you are from Mexico, generally the more expensive marijuana is. This tends to hold true because Alaska also has much higher prices than many other "user friendly" states. 

In accordance with the article, I would assume that demand for marijuana is relatively inelastic. People will buy the same amounts even if prices increase or decrease. However, many opponents of the legislation claim that with the legalization, prices will drop, resulting in more use of the drug.
Since it has now been legalized, will that have an affect on demand? I propose that there are some who have avoided marijuana due to its previously illegal stature, however, now that it is legal more people may decided to take part. 

Colorado has seen a small increase in price for legal dispensed marijuana, illegal marijuana is cheaper. I speculate that prices will remain the same or increase much like Colorado's market. After all, there is really no reason for the price to drop, especially when considering the inelastic nature of marijuana. 

Also, Colorado has seen increasing tax revenues. The Washington Post outlined some of Colorado's revenue from recreational marijuana use here ---  Tax Revenues

What do you think? Will prices drop with the legislation? Will demand increase? How will the tax revenues affect the Alaskan economy? 

5 comments:

Dave Tufte said...

Jerry: 100/100

Oh gosh Jerry. Aren't you cute with that title? I'm sitting here smirking, and I know I shouldn't be because it's kind of an obvious joke ;)

You have absolutely hit a nail on the head. Economists notice this in many policy discussions, but it doesn't seem to stop people form saying it. Specifically, many policy discussion assume that demand is elastic if prices move in one direction but inelastic if they move in another direction. It's ridiculous, but people keep it up.

In the case of something like marijuana legalization, you can't have it both ways. Either demand is inelastic, and penalties don't dissuade people much and price drops won't encourage them either ... or else demand is elastic and penalties will dissuade people and price drops will encourage a lot of people to begin toking up. Most critics of legalization claim that the first half of the first argument and the second half of the second argument go together. They don't.

As to state tax revenues, I think this is a case of monopolistic competition. Colorado, and Washington, and now Alaska will see some boom in revenues (that's the monopolistic part), but as soon as other states follow their lead, the revenues will go back to normal (that's the competitive part).

Trey said...

I love this topic because this is something so new in our society it will be interesting to follow all the various aspects of this huge experiment.

I believe once weed becomes legal in Alaska and the market matures the demand will be elastic. Eventually there will be several dispensaries to choose from and if the consumer doesn't like a price they will shop around for a better one. When a lower price is found a higher quantity is likely to be purchased. I don't think a drop in price will cause many new people to try pot. Once it becomes legal is when I think most people will go try it. Only the regular users will have any idea about the value of what they're buying anyways so price won't really matter as much to everyone else.

The price for weed in Colorado is expected to drop considerably this year with markets maturing to create stiff competition and costs dropping due to economies of scale and automation. Some believe this drop in price may drive the black marketout of business.

Dave Tufte said...

Trey: 47/50 (run on sentence to start the last paragraph).

Your second paragraph is a good example of what I've called (in other comments) an elasticity of novelty.

FWIW: I'm interested to see how this all pans out because I first heard about the idea that there weren't decent economic reasons for marijuana legalization not to work way back in 1982. I've been waiting a long time to find out if I'm right or wrong about this.

Susie said...

While the legalization of marijuana may increase the state’s tax revenue I have to wonder about the overall health of the state’s population. Marijuana use causes side effects such as dizziness, drowsiness, memory loss, euphoria, not to mention its addictive possibilities. While I do agree that there are medical benefits associated with the use of marijuana, I do not think that unmonitored use is the answer. The use of this potentially harmful drug could have dramatic effects for innocent bystanders. Individuals abuse alcohol then get behind the wheel of a motor vehicle. What’s to prevent individuals from using marijuana, either recreationally or medically, and then operating a motor vehicle? Sure there are laws against driving under the influence but we all know there are those out there that do not think that the law applies to them. They rationalize their actions and disregard the well-being of individuals who have no control over their actions.

Dave Tufte said...

Susie: 50/50

I love Susie's comment, because it points right to the nexus of this issue where economics matters the most.

Let's assume that all Susie's negative concerns are valid. And let's admit that there may be some positives (which Susie acknowledges).

The issue then is whether they'll get any worse or better on net if marijuana is legalized. And the answers to those questions are measurable as elasticities.

There actually is a pretty big literature on this, without much strong evidence either way.

FWIW: One of the big papers in this area is Pacula and Kilmer [2003], and its abstract always makes me laugh: "... we find a statistically significant association with arrests but not reported crime, suggesting that marijuana use may just influence the likelihood of getting caught committing these crimes." I just imagine the criminals committing the same crimes they always do, but the criminals who are potheads get caught because they fell asleep at the scene, or were still making a snack in the kitchen when the cops showed up. :-D