Hidden Costs of War on Drugs
The war over drugs presents a costly paradox: the amount of government funds spent to bust sellers, prosecute them, feed, dress and house them is enormous. What’s troubling about the marijuana issue is the amount of resources that the government uses to enforce current marijuana laws for a substance that is extensively used and cannot be considered any more harmful than alcohol and tobacco products.
The paradox lies in the fact that while spending huge amounts to round up pot users, the government is losing out on the revenue that could be generated by taxation on marijuana if it were legalized. Economist Stephen Easton of the Fraser Institute conducted a recent analysis of how much tax revenue the Canadian government would realize by legalizing marijuana.
Easton’s study found that the average price of 0.5 grams (a unit) of marijuana sold on the street was $8.60 while its cost of production was only $1.70. If there were a free market, the $6.90 profit for a unit of marijuana would be short lived. For the business minded who see the enticing profits to be had, the marijuana market would grow with new cultivation operations flooding the street and driving the cost down. This would be a good deal for the consumer but of course can’t happen when the drug is illegal. The idea of incarceration is a major deterrent for many who would consider marijuana growing operations; moreover, drug enforcement agents bust enough producers, sellers and users to keep street pot supplies low. The $6.90 profit per unit of marijuana is not a whole lot when the risks are considered. But for those who do participate in this type of trade the money to be made is irresistible. But under the current system the profit is turning out wealthy criminals and it is well known that organized crime plays its own role in the lucrative underground economy.
The analysis Easton conducted showed that if marijuana was legalized, the government would be able to capitalize on the profit margins that right now are in the hands of non-regulated growers and sellers. In his report, Easton wrote:
“If we substitute a tax on marijuana cigarettes equal to the difference between the local production cost and the street price people currently pay--that is, transfer the revenue from the current producers and marketers (many of whom work with organized crime) to the government, leaving all other marketing and transportation issues aside we would have revenue of (say) $7 per [unit]. If you could collect on every cigarette and ignore the transportation, marketing, and advertising costs, this comes to over $2 billion on Canadian sales and substantially more from an export tax and you forego the costs of enforcement and deploy your policing assets elsewhere. “
One point to note in particular is that in Easton’s scenario, the street price of marijuana remains the same and in turn the demand for the product would not change. But if marijuana were legalized, the demand would surely rise since it would no longer be considered a crime. Given the status quo, there is substantial risk to the both buyers and the sellers and an element of risk for the consumer because in any case it is an illegal drug. Again there is a paradox: marijuana use can have detrimental health effects for those who smoke it; yet the increased demand for marijuana would bring in huge profits on the taxation of it. There are a couple of advantages that legal marijuana would bring – the government can control the quality of the product and can set taxes based on consumption, not unlike the Canadian Liquor Control agencies do in most provinces in the country. Tax rates are a major key in the success of a legalized pot system – if the tax is too high marijuana growers will return to the underground economy to avoid heavy taxation.
Legalizing marijuana entails many economic, health, and social factors that must be considered. A singular study from one research institute will not decide the issue in Canada. But one cannot ignore that Easton's research undeniably outlines the economic benefits in the legalization of marijuana. Certainly, with a strained economy in Canada, federal and provincial governments need to develop new sources of revenue to continue to be able to pay for social benefits, universal health care and public education. There are examples for Canada to study, such as California, where legalization of marijuana seems to be a win-win situation.