Price Legalization and Marijuana Consumption
By: Mert Daryal (University of Western Australia) Undergraduate Journal of Economics The paper analyzed the effect of legislation on the consumption of marijuana. Methodology • Application of demand theory to illicit commodities to analyze the effect of legalization • Specially conducted survey of first-year students at the University of Western Australia to estimate effects of legalization and a possible fall in price on consumption Assumption • Price of marijuana would decrease following legalization Results • Consumption of marijuana is expected to increase by 4% if legalized; however, if legalization is accompanied with a 50% fall in price, consumption is expected to go up by 11% • Price is an important determinant of marijuana consumption; this is contradictory to the general perception of consumption to be ...view middle of the document...
The net cost, as a result, falls causing a shift towards the right in the demand curve. Legalization would also lead to a drop in the conventional money price as most likely many new suppliers would enter the industry. The change in equilibrium position due to the effect of legalization and the price fall that would follow it is termed as the “Gross effect” of legalization while the effect due to price change alone is termed as the “Net effect”. There however, is a possibility of the demand curve shifting towards the left with legalization. This can be attributed to the fact the illicit status assigned to marijuana consumption makes it a lucrative consumption item. In this case the “other cost” component discussed earlier is negative. The movement of the market curve would, in this case, depend on the relative strengths of the two opposing forces. Survey The survey found that 53% of respondents had consumed marijuana. They were termed as “users”. The other 47% were labeled “non-users”. The survey found out that legalization would eliminate the criminal sanctions and penalties associated with marijuana consumption leading to a drop in its “full price” and subsequently an increase in the consumption; the concept of a negative “other cost” component was non-existent. The consumption was estimated to increase in the tune of 8% overall for all users . However, for non-users, the same figure stood at less than 1%. Male respondents were more responsive to legalization, their consumption was estimated to increase by 6%; the same figure for females was 3%. The effect of a price drop was found to be more than that of legalization. The price drop causes a further rightward shift in the new demand curve estimated as a result of legalization. The survey revealed that consumption is usually more responsive to legalization and the subsequent price drop than to legalization itself. The survey also revealed that as expected, the gross price elasticity is always greater than the net price elasticity.