Ed Lotterman: The economics of legalized marijuana

May 16, 2014 

CRB Ed Lotterman

Ed Lotterman

CRAIG BORCK — Staff

A bill to legalize the sale and use of marijuana for "medical purposes" recently passed in my home state of Minnesota. Similar initiatives are underway in several other states, although passage is not likely for all. But there certainly seems to be a national tide to make cannabis use legal.

Social aspects of "mood-altering substances" are complex, to say the least. But what about economic ones? These certainly exist. Some libertarian economists, most notably Nobel laureate Milton Friedman, advocated legalization of marijuana use decades ago. So it is a legitimate topic for economic analysis.

The libertarian argument is that if there is some substance that humans want to use to increase their own satisfaction and no one else is hurt, laws ought not prohibit that, even if other people think consumption is immoral and even if use of the substance causes tangible harm to the person consuming it. Many economists who don't consider themselves libertarians, including me, agree with this in general terms.

The crucial issue, however, is whether there is harm to others. Or are potential users suckered by an "information problem" into starting frequent use that has far higher personal costs than they first realize, but that, given the physically addictive nature of many substances, is difficult to end? If either of these conditions exists, legalization may decrease economic efficiency. In other words, society will see fewer of the needs and wants of people satisfied out of the same use of resources. Restrictions may make society better off.

Take the issue of externalities first. Using alcohol to alter mood predates history. And it seems there always have been external costs of such use in the form of violence and destruction of property.

The broad social costs of alcohol consumption are enormous. Driving while intoxicated alone causes tens of thousands of deaths and many more injuries, plus billions in property damage. Governments spend further billions for police to control drunk people or for emergency personnel to clean up the aftermath. Yet, except for an experiment with Prohibition a century ago, we continue to allow use of alcohol, albeit with limitations.

As a society, the consensus is that the external costs of a total ban on alcohol production and use are greater than tolerating them under regulated circumstances. Similarly, while we increasingly regulate tobacco consumption, there is little movement to ban its sale.

Tobacco is interesting in that it may be even more addictive than alcohol or most currently illegal drugs. It also harms the health of nearly everyone who uses it. But for decades, if not centuries, the extent of such harm was not fully appreciated. The decision to use is often made at an age where true informed consent is not really possible. And there are some external costs, especially through secondhand smoke.

The restrictions adopted are pretty much in line with what economists would see as the market failures. Bans on sales to minors address one "information problem." Health warnings or the pictures of cancerous organs required on packages in some countries also address the information problem. And bans on smoking in confined spaces cause some reduction in the external costs of second-hand smoke.

Advocates of varying degrees of legalization also argue that some illegal drugs, especially marijuana, provide positive benefits that are denied to society with outright bans. Among other things, cannabis can relieve glaucoma and the terrible side effects of chemotherapy. And there are other legitimate medical applications. As someone who was starting seven difficult weeks of chemotherapy myself just two years ago, I find this argument important. So do most other people, and that is why legalization for "medical" purposes is often the first step toward allowing broader use.

Marijuana, cocaine, meth, heroin and other illegal drugs all have external costs. But advocates of some degree of legalization are correct in noting that in many cases, the largest external costs are the result of the illegality, not the use itself. Just as during prohibition, legal bans artificially boost the price and profitability of supplying a product. Trafficking on streets, thefts to support habits, bribing of public officials and violence between rival gangs all largely stem from prohibition rather than use. European countries that have adopted varying degrees of decriminalization have seen such problems drop, although not disappear.

The cost to government budgets of policing illegal drugs is enormous, as are the costs of prisons for the millions of people convicted of drug-related crimes, often ones of minor possession and use. Moreover, by branding millions of people as ex-convicts, we permanently harm their employability and hence their economic productivity.

Libertarians would add that economic efficiency is not the only consideration. So is liberty. If an overweight economist with high blood pressure can choose to eat bacon when he wants, why can't someone else smoke a joint?

If so, why not let someone mainline heroin if they want? That is the uncomfortable question for many of us.

A final consideration is a global one. For years, we have strong-armed drug-producing countries such as Mexico, Columbia, Peru, Afghanistan and Myanmar to crack down on producers. This has often imposed enormous budgetary and social costs on these countries.

Now, we are reversing course without any hint of consultation over this. Domestic politics usually trump international obligations in most countries, but we should not be surprised if the U.S. swing toward greater toleration of drug use causes some resentment in the affected countries.

Economist Edward Lotterman writes in St. Paul, Minn. Write him at boise@edlotterman.com.

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