Business Update with Mark Lacter |

The economics of legalizing pot

I'll bet that some social economists out there hope voters will approve the initiative to legalize marijuana in November, if only to see how the marketplace reacts. Proponents are talking about added tax revenue of $1.4 billion a year, which no doubt would trim the state's deficit – some day – and perhaps create tens of thousands of new California jobs, some day. Those numbers are just guesses – the truth is no one has the first clue how this might shake out. And putting aside the morality, there are big questions about the economics, starting with the farmers in Humboldt County. They’re not happy on any number of counts, not the least of which is concern that their prices will come down (a reasonable assumption) and thus jeopardize that $1.4 billion in tax revenues.

And what about the taxes that growers themselves would face when their businesses are legalized? Pay taxes? That’s what these folks have been avoiding all their lives. A new kind of black market might emerge in which the players try to get around legal distribution, much the way cigarettes are often bootlegged to avoid hefty taxes. All of which assumes that the initiative, if passed, will survive what will be a torrent of legal challenges, both at the state and federal level. Even if the courts sign off on the initiative (a monster assumption) how would this thriving part of the underground economy fare in the mainstream? One possibility seems remote: the major cigarette makers wanting to enter the market. Kevin Drum at Mother Jones explains:

“So what would stop the multinational marketing juggernauts from doing exactly that? For starters, the federal government, which still classifies marijuana as a Schedule 1 drug--as it's required to do by international treaty. That means it's flatly prohibited, and even if the feds decided not to bother prosecuting small-time growers they'd almost certainly go after a Fortune 500 corporation that got into the business. Along with the PR damage of being part of the pot industry, this would almost certainly be enough to keep the Philip Morrises of the world at bay."