The Economics of Prop 19

by Alan Reynolds

Possession of marijuana is said to be “illegal” — even tiny amounts in the privacy of your own home. That obviously does not mean that pot has been effectively banned. It simply means that an unlucky few who happen to get caught can be subjected to capricious, heavy-handed punishment.

The most that this quixotic façade of illegality could possibly accomplish is to raise the price of marijuana by restricting supply (e.g., by destroying local or imported plants). The higher price might reduce demand, but that same result could also be accomplished with taxes, as in the case of tobacco and alcohol. In the latter case, the lucrative profits stemming from restricted supply go to the government; with marijuana, they go to foreign and domestic drug lords and pot farmers.

By restricting supply and thus raising prices, prohibition enforcement is essentially a taxpayer-financed subsidy for the marijuana industry. Unlike other “sin taxes,” prohibition of pot acts as a price-support program for marijuana farmers and distributors. There is also a “risk premium” added to the retail price, because marketing marijuana involves some danger of being sent to prison. When combined with the subsidy resulting from restricted supply, the risk premium provides an irresistible temptation to those most willing to accept big risks in exchange for big rewards, such as violence-prone gangsters. Such people don’t mind selling to children either. Unlike legal firms with liquor licenses, there is no disincentive to sell to minors.

If possession of marijuana were decriminalized, it could finally become susceptible to effective regulation, including taxation and licensing. And police, courts, and prisons are scarce and valuable resources. To the extent that those resources continue to be wasted in propping up marijuana profits, they will not be available to curtail violent crimes with real victims.

But what makes sense economically can sometimes be the opposite of what makes sense politically, and there are powerful interests that want prohibition preserved.

In 1983, Clemson economist Bruce Yandle came up with the phrase “bootleggers and Baptists” to describe how moralists can be duped into making common cause with those who profit from the prohibition of liquor. The pretense of prohibiting marijuana attracts the same sorts of strange bedfellows.

House Speaker Nancy Pelosi told the Huffington Post that senior Mexican government officials have lobbied U.S. leaders against legalizing marijuana in California. Why? The authors of a recent Rand Corporation study conclude that Proposition 19 “would effectively eliminate Mexican drug-trafficking organizations’ revenues from supplying Mexican-grown marijuana to the California market.” That suggests some benefit to California marijuana growers (though they too fear a lower price) at the expense of the Mexican economy. Unsurprisingly, California beer and beverage distributors, fearing new competition, are lobbying against Proposition 19. So is a police group, Public Safety First, that fears less loot from auctioning off property seized in drug raids.

The simple economics of supply, demand, and risk all guarantee the futility of attempting to use prohibition to restrict supply and raise risk, with the unintended consequence of boosting drug cartels’ profits from smuggling. In short, Prop 19 is very good economics.

Alan Reynolds is a senior fellow with the Cato Institute, and the author of Income and Wealth.

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