HaCKeRz KrOnIcKLeZ 3/HaCKeRz_KrOnIcKLeZ.iso/drugs/economics.of.cannabis.legalization

Internet Message Format | 1996-05-06 | 36KB

From: Jim Rosenfield <[e-mail]>
Newsgroups: talk.politics.drugs
Date: 12 Oct 93 09:28 PDT
Subject: Economics of Cannabis Legalization
Message-ID: <[e-mail]>

Economics of Cannabis Legalization
(Paper submitted for the Drug Policy Foundation Conference,
Nov. 1993.  Comments cordially solicited.  Please do not cite without permission.  Oct. 10, 1993)
 by Dale Gieringer, Ph. D. 130 Wilding Ln, Oakland CA 94618
      Coordinator, California NORML:  [phone].

Abstract:

Marijuana legalization offers an important advantage over
decriminalization in that it allows for legal distribution and taxation of
cannabis.   In the absence of taxation, the free market price of legal
marijuana would be extremely low, on the order of five to ten cents
per joint.  In terms of intoxicating potential, a joint is equivalent to at
least $1 or $2 worth of alcohol, the price at which cannabis is currently
sold in the Netherlands.  The easiest way to hold the price at this level
under legalization would be by an excise tax on commercial sales.  An
examination of the external costs imposed by cannabis users on the
rest of society suggests that a "harmfulness tax" of $.50 -$1 per joint is
appropriate.  It can be estimated that excise taxes in this range would
raise between $2.2 and $6.4 billion per year.   Altogether, legalization
would save the taxpayers around $8 - $16 billion, not counting the
economic benefits of hemp agriculture and other spinoff industries.

The Case for Legalization:

    As drug war hysteria subsides it becomes increasingly certain that
there must be a serious re-examination of the laws prohibiting
marijuana.  The decriminalization of soft drugs has now emerged as an
active political issue in Germany,  Italy, Switzerland, France and
Australia. The policies being considered range from "decriminalization,"
or repeal of criminal penalties for private use and cultivation of
cannabis, to full "legalization," in which cannabis is commercially sold
like alcohol, tobacco and other commodities.
    Decriminalization has enjoyed impressive support from a
succession of official panels, including the Presidential Commission on
Marijuana, the California Research Advisory Panel, and the Canadian Le
Dain Commission.  Decriminalization was also officially  the policy of the
state of Alaska from 1976 through 1990, when it was narrowly
overturned in a referendum.  The basic appeal of decriminalization is
to reduce the harm of criminal punishment and respect personal
freedom and privacy, while avoiding offensive commercialization.  The
basic flaw in decriminalization is that it does not make allowance for
pot users who cannot or will not grow their own.   The result is to
create an illicit black market for cannabis that is neither regulated nor
taxed, leaving many of the same basic enforcement problems as
prohibition.
    These problems can be avoided by legalization, under which
cannabis could be legally sold, taxed and regulated like alcohol or
tobacco.   (It should be noted that legalization need not involve the
evils of commercialization, given suitable restrictions on advertising).
The world presently has no example of a completely legalized cannabis
market, since this is forbidden by the Single Convention Treaty on
Narcotics.   The nearest approximation may be seen in the Netherlands,
which officially tolerates the possession and sale of up to 30 grams of
hashish or marijuana in coffeehouses, although distribution and
manufacture are technically illegal and large-scale traffickers are
punished.  The apparent success of the Dutch in controlling hard drug
abuse without a major hashish abuse epidemic has led a league of 15
European cities to endorse the principle of legalized cannabis in the so-
called Frankfurt Resolution.  An important advantage of legalization is
to open the door to taxation of marijuana - a potentially valuable
source of public revenue - while eliminating the need for an illegal
market.
    In the following, we will examine more closely the economics of a
legalized cannabis market.

The Cheapest Intoxicant:

    In an  untaxed free market, cannabis ought to be as cheap as other
leaf crops.  Bulk marijuana might reasonably retail at the price of other
medicinal herbs, around $.75 -$1.50 an ounce.  Premium cured and
manicured sinsemilla buds might be compared to fine teas, which
range up to $2 per ounce,  or to pipe tobacco, which retails for $1.25-
$2.00.  This appears to have been the historical price range for
cannabis in the days when it was still legal:  advertisements from
medical catalogs imply that it sold for around $2.50-$5 per pound  in
1929-30.  1    Adjusting for inflation, this works out to $1.20-$2.40 per
ounce,  a breathtaking 100- to 300-fold reduction from today's illicit
prices, which range from $100- $200 per ounce for low-grade Mexican
to $400- $600 per ounce for high-grade sinsemilla.
    It is useful to translate these prices to a per-joint basis, where one
joint is defined to represent the standard dosage of marijuana.   The
number of joints in an ounce depends on the potency of the product
involved, where potency is measured in terms of the concentration of
tetrahydrocannabinol (THC), the chief psychoactive ingredient in
marijuana.  THC potencies typically range from 2-3%  for low-grade
leaf to 10-15% or more for premium sinsemilla buds.  We will define a
standard dose of THC to be that contained in the government's own
marijuana joints, which NIDA supplies to researchers and selected
human subjects.  These consist of low-quality  2.5%-3% potency leaf
rolled into cigarette-sized joints of 0.9 grams, yielding a 25 milligram
dose of THC.   The same dose can be had in a slender one-third or one-
quarter gram joint of 10-12% sinsemilla.    A typical joint has been
estimated to weigh about  0.4 grams.2  Taking this as a standard, we
will define a "standard joint" to be 0.4 grams of average-quality 6%
buds.   Thus an ounce of "standard pot" equals 60 joints,  an ounce of
12% sinsemilla  120, and an ounce of government pot only 30 joints.
Due to the fact that the price of marijuana tends to be proportional to
potency, the price of a one-quarter gram joint of $600-per-ounce
sinsemilla is about the same as a one-gram joint of $150-per-ounce
ditchweed, that is around $6.
    We have seen that in the absence of taxation, the price of legal
marijuana would be cut by a factor of 100 or more.  At this rate, a joint
costing $6 today would cost less than $.06 in a free legal market.  It
therefore appears that marijuana would be a very cheap bargain
compared to other intoxicants, including alcohol.
    The free-market price of joints can also be calculated by comparison
to tobacco cigarettes, which would probably cost the same to
manufacture.  Cigarettes now sell at an average of $1.83 per pack, or
$.09 per cigarette, one-quarter of which represents federal and state
taxes.3  There is no reason to think that joints could not be sold for the
same price under legalization.
    At a nickel per joint, marijuana would be a uniquely economical
intoxicant.  For only one-half dollar per day, a pothead could nurse a
whopping ten-joint per day habit.   It may be doubted whether public
opinion would tolerate so low a price for marijuana.   On one hand, it
would invite extensive abuse.  Parents would no doubt object against
making a serious marijuana habit so affordable for their young.
Moreover, cheap pot would also pose a serious challenge to the alcohol
industry, a powerful political interest, whose products are over ten
times as expensive.  In order to make legalization politically palatable,
it would almost certainly be necessary to raise the price through
taxation or regulation.

Putting a Value on Cannabis:

    One way to estimate a reasonable price for marijuana is to evaluate
it in comparison to the major competing intoxicant, alcohol.   While it is
impossible to make an exact comparison between pot and booze, since
their duration and effects are different and dosages vary from person
to person, a joint might be roughly equated to an intoxicating dose of
alcohol - between one and two ounces, or two to four drinks.   Thus one
joint might be worth two to four 12-oz. beers or  1/3 - 2/3 bottle of
wine.  These are currently sold on grocery shelves at a minimum price
of around $1.25 - $2.50.   It may therefore be concluded that a
reasonable minimum price for marijuana should be around $1.25 -
$2.50 a joint, with higher prices for premium grades.  This works out to
$75 - $150 per ounce for standard 6%-potency marijuana.
    Coincidentally, this price range is in line with that presently seen in
the Netherlands, where coffeehouses sell hashish and sinsemilla by the
gram for 4 to 15 guilders, or $2.15- $8.10.4  Taking the cheaper grade
to yield two joints per gram and the premium grade four, this works
out to $1 to $2 per joint.   The fact that the Dutch have not been
plagued by widespread cannabis abuse and indeed believe they have
obtained public health benefits from their system provides reassurance
that this price level is realistic.5
     It should be noted that Dutch prices are inflated by the fact that
cannabis remains illegal, not by any form of legal taxation  (though the
state does tax cannabis indirectly through the sales tax on cafes).
Although Dutch authorities tolerate a number of small-scale domestic
producers, international traffickers and domestic distributors are both
subject to busts at the whim of the police.  As a result, Dutch
consumers pay inflated black market prices.  This is not necessarily the
optimal model for marijuana price control, since the lion's share of the
profits go to illicit traffickers.
    In a legalized market, the easiest way to maintain marijuana prices
would appear to be through some form of excise tax, as presently
imposed on alcohol and tobacco.  This could conveniently be assessed
on licensed manufacturers or wholesalers, like the federal tax on
cigarettes.  Aside from a strict prohibition against sales to unlicensed
distributors, cultivators need not be directly regulated.   Excise taxes
have the advantage of being easy to enforce, since they involve a
relatively small number of distributors.  The latter in turn pass the tax
along with a markup, magnifying the price increase throughout the
distribution chain.
    Another way to control the market would be to tax or regulate
cultivation.  However, experience shows that it is no easy task to track
down and regulate marijuana growers.  More so than alcohol or
tobacco, marijuana lends itself easily to small-scale home cultivation
and production.   The problem therefore arises as to how to treat home
cultivation in the legal market.  Clearly, the sale of untaxed home
marijuana must be banned.  In theory, home cultivation could also be
taxed and licensed in order to maintain high prices.  However, it seems
unlikely that such requirements could be enforced in a world of
legalized marijuana. The policing of home growers would appear to
require many of the most odious and objectionable techniques of
current marijuana enforcement, such as  helicopter surveillance,
snooping on homes and spying on garden stores.
    The most practical policy is thus likely to be the one most consistent
with principles of personal freedom and civil liberties, namely to let
Americans grow their own cannabis at home, just as they might  grow
tomatoes, apples or grapes.  The inducements to home cultivation
should not be exaggerated:  in Alaska, where it was the one legal way
to get marijuana before 1991, pot continued to be sold illicitly at prices
around $250 an ounce, proof that many pot smokers are quite
disinclined to grow on their own.   Nonetheless, home cultivation would
effectively put a lid on the amount marijuana could be taxed, since
consumers would be induced to grow their own if prices rose too high.
    Another possible way to limit marijuana abuse would be to regulate
consumers directly, for instance, by requiring "user's licenses" for the
right to buy or use marijuana, as proposed by Kleiman.6  By charging
fees for these licenses, the state could raise tax revenues.   User fees
are apt to be more costly to administer than excise taxes, since they
must be collected from a much wider population.   More importantly,
they are also apt to be unenforceable, given the ease with which
unlicensed users can grow their own at home.  One situation in which
user fees might be attractive would be under a regime of
decriminalization,  where commercial sales were illegal.   Consumers
might then be allowed to purchase a license to consume and grow
marijuana for personal use.  In this system, licenses would afford the
one opportunity for the government to derive tax revenues from
marijuana, while an active marijuana surveillance program  would still
be needed to prevent commercial sales and unlicensed use.
    The problem of cannabis enforcement was first rigorously addressed
one hundred years ago by the British Indian Hemp Drugs Commission.7
The commission concluded that cannabis prohibition was not
practicable, and that the best solution was to tax it to the extent
possible.  After examining the different regulatory systems in various
provinces of India, the Commission especially recommended the
system in Bengal, where cannabis was taxed more rigorously than in
other provinces by means of a system of excise fees and vendors'
licenses.   Noting that hemp drugs tended to be much cheaper than
liquor, the Commission argued that cannabis was undertaxed.8   It also
noted that there were regions where cannabis grew wild, in which it
was virtually impossible to control traffic in bhang, a low-potency
beverage made from leaves.  Cannabis remained legal in India  until
recent years, when it was banned under pressure from the U.S.

Computing A Harmfulness Tax

    The question might well be asked from a libertarian free-market
perspective why cannabis (or other drugs) should be taxed in the first
place.  Why should government concern itself with regulating what is
in essence a private decision, that is, what kind of drugs to ingest?
Why shouldn't prices simply be settled by supply and demand?
    The best answer is that marijuana consumption may impose costs on
innocent third parties who do not consume it.  According to standard
economic theory, such "external costs" may be compensated by means
of a harmfulness tax. 9 Examples of external costs of drug abuse
include increased insurance costs, accidents affecting third parties, and
drug-induced violence and criminality.  In principle these costs must
be distinguished from "internal costs" that fall on the user, such as ill-
health, reduced personal income, poor achievement, etc.  Because users
already pay for the latter, there is no sense in making them pay again
through a tax.
    From a non-libertarian, public health perspective, higher taxes are
often justified simply as a disincentive to prevent people from
overindulging in what is presumably an unhealthy habit.  This
argument is most persuasive in the case of highly addictive drugs such
as nicotine, where naive users run a high risk of getting themselves
trapped in an unhealthy habit due to initial misjudgment.  Punitive
taxation appears less justifiable in the case of cannabis, not only
because it has low addictivity, but also because of the ease with which
home growers can evade excessive taxes.
     In the  following discussion, we will examine the external costs of
marijuana abuse as the basis for a prospective harmfulness tax.  At the
outset, it should be noted that much further epidemiological research is
needed to accurately assess the costs of marijuana;  nonetheless,  it is
possible to hazard a guess at their magnitude.  Overall, the general
scientific consensus is that marijuana has definite deleterious effects,
though less so than alcohol or tobacco.  In the words of the California
Research Advisory Panel: "An objective consideration of marijuana
shows that it is responsible for less damage to society and the
individual than are alcohol and cigarettes."10
     From a physiological standpoint, the major health risk of heavy
marijuana use appears to be respiratory harm due to smoking.11   A
recent epidemiological study by the Kaiser Permanente Center for
Health Research found that daily cannabis smokers had a 19% higher
rate of respiratory complaints.12    Aside from cases of passive
smoking, these must be counted as internal costs, except to the extent
that they may raise group health insurance costs for others.   (There
are actually good grounds to believe that legalization would reduce the
costs of respiratory damage from marijuana smoking by encouraging
the development of better smoke filtration technology, the substitution
of more potent, less smoke-producing varieties of marijuana, and the
substitution of oral preparations for smoked marijuana.)
    More important than the respiratory harm of marijuana is the
increased risk of accidents due to mental impairment.   In the Kaiser
study, this emerged as the number one hazard of marijuana use, with
daily users reporting a  30% higher rate of injuries than non-users.
Presumably, these injuries reflected an increased risk of accidents that
might also involve third parties.  Hence, accidents should probably be
counted as the major external cost of marijuana use.   Other concerns,
such as amotivation, poor school performance and the controversial
"gateway drug" syndrome are more properly classified as internal
costs.
    In order to quantify the external costs of marijuana, it is useful to
consider those of alcohol and tobacco.  These are shown in Table 1,
based on an analysis by W. Manning et al.13  aimed at estimating the
appropriate level of taxation for alcohol and cigarettes.   Manning's
analysis shows how the health costs imposed on the insurance system
by tobacco- and alcohol-related illness tend to be counterbalanced by
the fact that smokers and drinkers  die younger, and therefore collect
fewer pension and retirement benefits.

Table 1 - External Costs of Drug Use
                       Cigarettes (pack of 20)*     Alcohol (1excess oz)*  MJ (1joint)
Health Costs   $0.15  smoking diseases     $0.26                   $.01-.02 smoking
                           $0.23 passive smoking
Accidents                                                        $0.93                     $0.38-0.93
Total                  $0.38                                      $1.19                    $0.40-0.95
* Source: Manning et al., "The Taxes of Sin: Do Smokers and Drinkers
Pay Their Way?," JAMA 261:1604-9.

    In the case of tobacco, Manning estimates the gross cost of medical
care for smoking-related diseases at $.26 a pack, or just over one
penny per cigarette.   This turns out to be largely compensated by
savings in retirement pensions and nursing home care for smokers.
The final balance is highly sensitive to technical assumptions about the
economic discount rate, and can even be made to show net external
benefits at  interest rates under 3%.  Manning's final net estimate of
$.15 per pack assumes a 5% interest rate.
    By estimating the equivalency between joints and cigarettes, one can
translate these costs to marijuana.   On a weight-for-weight basis, pot
smokers inhale about four times as much noxious tars as cigarette
smokers;14 as we have seen, however, the average joint weighs about
half as much as a cigarette.  Also, cannabis lacks nicotine,  a leading
factor in tobacco-related heart disease.  It seems reasonable on this
basis to suppose that a joint is equal to less than two cigarettes, putting
the net external cost of marijuana smoking at under 1.5 cents per joint.
    One fault in Manning's accounting of external costs is that it excludes
the costs of second-hand smoking,  which he estimates at $.23 per
pack, on the questionable grounds that these costs are mainly internal
to the users' families.  We treat them here as external costs instead.
There are grounds to think that passive smoking is of much less
concern with cannabis since pot smokers emit less smoke than
cigarette smokers.  It therefore seems reasonable to conclude that the
total smoking-related costs of active and passive pot smoking are
unlikely to exceed two cents per joint.
     Turning to alcohol,  Manning concludes that the net medical-less-
pension costs of alcoholism-related disease are $.26 for every "excess
ounce" of alcohol, which is defined to mean an ounce in excess of one
per day (Manning does not try to account for the possibility that
moderate consumption may actually extend life).  These costs turn out
to be greatly outweighed by the cost of alcohol-related accidents, which
he estimates at $.93 per excess ounce.  This figure includes traffic
accidents to third parties caused by drunken drivers, but does not
appear to include other alcohol-related accidents.  Also missing from
Manning's account are the external costs of alcohol-related violence.
Altogether, Manning concludes that the total cost of alcohol is $1.19 per
excess ounce, or $.48 per ounce when averaged over all alcohol drunk.
     While the cost of alcohol seems clearly dominated by accidents, it is
unclear how to relate these to marijuana.  The burden of expert opinion
appears  to be that marijuana is less of an accident risk than alcohol,
though this is disputed.15    Studies of fatal car accidents indicate that,
at least on the road, marijuana tends to be a secondary risk factor
compared to alcohol.16  On the other hand, one survey of  trauma
patients found that with respect to all accidental injuries, cannabis may
be every bit as much a risk factor as alcohol.17  In terms of
intoxicating potential, one joint probably lies between one ounce and
one excess ounce of alcohol.   At the high end, if one equates a joint
with one excess ounce, the accident costs of pot would be $.93 per joint.
More reasonably, one could equate a joint with an "average" ounce of
alcohol, the accident costs of which work out to $.38.  There are reasons
to favor a lower external cost on marijuana relative to alcohol, notably
the fact that marijuana tends to suppress violence, whereas alcohol
tends to aggravate it.   From this perspective alone, an overall shift
from alcohol to marijuana may be desirable.
    In conclusion, one can reasonably argue that marijuana should be
assessed a harmfulness tax of  $.40 to $.95 per joint - or, say, $.50 - $1
in round figures.  Experience indicates these taxes would probably be
magnified at least twofold in the market, resulting in a minimum retail
price of $1 - $2 per joint.18   Happily, this is consistent with the target
price range we derived previously.
    Different lines of reasoning thus converge to argue that cannabis
should be taxed at  $.50 to $1 per joint.  That is $15-$30 per ounce for
low-grade 3% leaf or $30 - $60 per ounce for 6% standard cannabis.
Ideally, the tax rate per ounce should be proportional to THC potency.
In practice, this could be implemented through a schedule of fixed
product categories similar to those used for alcohol (beer, wine and
hard liquor).   These categories might include: (1) leaf (potency <3%),
(2) standard blend cannabis (4 - 10% potency), and (3) high-grade
sinsemilla or hashish (potency>10%).  Other cannabis-based products,
such as hashish, hash oil, tonics and foodstuffs, could be taxed
according to their leaf or bud content.  It should be noted that low-
grade leaf, though harsh for smoking, could play a valuable role in the
market as a source for cooked preparations and extracts, which are
likely to play an increasing role in the market as health-conscious
consumers seek to avoid smoking.

Revenues From Legalization:

    Assuming a tax of  $.50 or $1 per joint, we can venture a rough
estimate of the revenues that could be raised from legalized cannabis.
According to the 1991 National Household Survey on Drug Abuse, some
19.5 million Americans used marijuana at least once in the year, of
whom 5.3 million used at least once a week and 3.1 million daily.
About one-half  of the latter are thought to be multipleJdaily users,
who can be expected to make up the bulk of total consumption.19
Assuming the mean consumption of all daily users is two or three
joints per day, current national consumption can be figured to exceed 7
to 10 million joints per day, or 1200 to 1800 metric tons of 6% THC
cannabis per year.  These figures may well be low, since the Household
Survey underestimates actual use.  A considerably higher estimate is
given by Kleiman, who puts 1986 consumption at the equivalent of
2700 metric tons of 6% THC cannabis;  other trafficking-based
estimates range as high as 4700 tons.20
    Consumption would surely expand further in a legal market where
joints were freely and cheaply available.  At the height of marijuana's
popularity around 1979, consumption was over twice that of today.
One factor that could significantly expand the demand for legal
cannabis in the future would be the development of mild cannabis
beverages like bhang, which traditionally constituted the bulk of
demand in India.  It is therefore not unreasonable to forecast ultimate
consumption at 15 - 30 million joints per day, or 2750 - 5500 metric
tons of 6% THC cannabis per year.
    The obvious question remains what portion of consumption would
be absorbed by home growers.   As we have seen, it is probably
hopeless to limit personal use cultivation.   Home growing would
naturally be most attractive to heavy users with little money, who
probably account for a major share of consumption. At $2 per joint, a
three-joint per day habit would cost over $2000 a year, a hefty
incentive for any home gardener.   It therefore seems likely that home
cultivation would absorb a substantial portion of  the consumption of
multiple daily users, who are estimated to account for 60% of the total
market.21
    We shall estimate the size of the commercial cannabis market by
posing two price scenarios.  (1) Given a $.50 excise tax and a minimum
price of $1 per joint, we will assume that home growing absorbs 20% of
consumption (that is, one-third of the consumption of multiple daily
smokers), leaving a commercial demand of 12-24 million joints per
day.  This works out to about $2.2 to $4.4 billion per year in tax
revenues.  (2) Given a $1 excise tax and a price over $2 per joint, we
assume commercial consumption would be cut by 40% to 9 - 18 million
joints, yielding $3.2 to $6.4 billion per year.  We conclude that
revenues from cannabis excise taxes might range from $2.2 to $6.4
billion per year.    This is comparable to the revenues currently raised
through the federal tax on alcohol ($8 billion) and cigarettes ($5
billion).
    By comparison, in the Netherlands, a nation of 15 million people,
total domestic sales of soft drugs have been estimated at under 1
billion guilder, or $500 million. 22 Extrapolating this to the U.S.
population, one arrives at total retail sales of about $8 billion.  If one-
half of this went to taxes, one would get $4  billion per year.
    Similarly, in Bengal, with a population of 50 million, the Indian
Hemp Drugs Commission reported total tax revenues from ganja of 24
million rupees in the year 1892-3, or about $10 million (1892
dollars).23    Extrapolated fivefold to the current U.S. population, this
would work out to $700 million in 1992 currency.  The tax on ganja
was about 8 rupees per kilo in Bengal, or just $.04 per joint in current
dollars. 24 Were the tax increased tenfold to the level we have
proposed, revenues would presumably increase to $7 billion, minus a
substantial amount due to decreased demand from higher prices.
    In addition to excise taxes, states could impose sales taxes on
cannabis.  Unlike excise taxes, sales taxes would be proportional to final
retail price, including the added markup for premium brands.  Just like
alcohol, it can be expected that marijuana would often be sold for
substantially more  than its minimum price:  in a hotel bar, a good
sinsemilla joint might well go for $5.   Assuming average retail prices
of $ 1.50 - $2.50  per joint, and sales taxes between 4% and 6%, the
total revenues raised might range from $200 million to $1.3 billion.
    In addition, legalization would create numerous revenue-generating
spinoff industries, such as coffee houses, gardening equipment and
paraphernalia.  The city of Amsterdam, with a million people, boasts
300 coffee houses retailing cannabis.25    Translated to the U.S, this
would amount to over 60,000 retailers and 100,000 jobs.
     Finally, the legalization of cannabis would also permit the
agriculture of hemp, a versatile source of fiber, protein, biomass and
oil, which was once one of America's top crops.  Hemp production might
well rival that of other leading crops such as cotton or soy beans, which
are currently on the order of $ 6 - 10 billion per year.
    On the other side of the ledger, legalization would save the
considerable economic and social costs of the current criminal
prohibition system.  Current federal drug enforcement programs run at
$13 billion per year.  State and local programs are probably of similar
or greater magnitude:  in California, the Legislative Analyst's Office
estimated the cost of state drug enforcement programs at around $640
million per year in 1989-90, plus perhaps twice as much more in local
expenditures.26   A sizable chunk of these costs involve cannabis,
which accounts for 30% of drug arrests nationwide.   Legalization of
cannabis would also divert demand from other drugs, resulting in
further savings.  If legalization reduced current narcotics enforcement
costs by one-third to one-fourth, it might save $6 - $9  billion per year.
    The economic benefits of marijuana legalization are summarized in
Table 2.  The total direct savings to government in taxes and
enforcement come to some $8 - $16 billion per year.  These figures are
somewhat lower than those sometimes bandied about in public
discourse, as both legalizers and prohibitionists have a tendency to
make consumption estimates that are in our opinion inflated.
Nonetheless, the benefits of legalization seem both substantial and
undeniable, and deserve to be taken seriously.

Table 2 - Economic Benefits of Cannabis Legalization
Excise Taxes                                           $2.2 - $6.4 Billion
Sales Taxes                                             $0.2 - $1.3 Billion
Enforcement Savings                           $6   -  $9 Billion
Hemp Industry                                       $6   - $10 Billion
Others:  Spinoff industries, Reduced hard-drug and alcohol abuse

FOOTNOTES

1A 1929-30 Parke-Davis catalog advertised a 4 oz. bottle of
tincture of cannabis of 20% potency for $5,  which works out to
the equivalent of  $5 per pound at 5% potency.   Another Squibb
catalog of uncertain date lists powdered cannabis at $2.50/lb:
from the collection of Dr. Tod Mikuriya.
2 Peter Reuter, cited in Mark Kleiman, Marijuana: Costs of Abuse,
Costs of Control, Greenwood Press, N.Y. 1989: p 38.
3 Tobacco Institute, The Tax Burden On Tobacco: Historical
Compilation, Washington DC 1992.
4 A.C.M. Jansen, Cannabis in Amsterdam:  A Geography of
Hashish and Marihuana,  desktop publishing: Dick Coutinho,
Postbus 10, 1399 ZG Muiderberg, Netherlands, 1991: p. 67.
5A similar price range may be found in the state of South
Australia, where the cultivation of fewer than 10 plants has
been decriminalized to a minor misdemeanor punishable by a
fine.  There cannabis is sold on the black market for about $100-
$150 per ounce, about one-half to one-third the price elsewhere
in Australia.
6 Mark Kleiman, Against Excess: Drug Policy for Results,  Basic
Books, N.Y. 1992.
7 Report of the British Indian Hemp Drugs Commission, 1893-4,
Simla, India (7 Volumes).
8 In Bombay, the Commission heard testimony that "the
ordinary liquor consumer pays twice as much for what he wants
as the ordinary ganja consumer would, or three times as much as
the ordinary bhang drinker.  I think the rates should be
equalized." (Report of the British Indian Hemp Drugs
Commission, 1893-4,, Vol. 1, Chap. XVI, p. 327).   Even in Bengal,
where taxes were  higher, the Commission found that "the
average allowance of liquor to the habitual consumer was "much
higher than in the case of ganja."  It concluded, "Judged by this
test, there is room even in Bengal for increased taxation"  (ibid.,
p. 311).
9 Lester Grinspoon, "The Harmfulness Tax:  A Proposal for
Regulation and Taxation of Drugs<" North Carolina Journal of
International Law & Commercial Regulation 15#3: 505-10 (Fall
1990)
10 20th Annual Report of the Research Advisory Panel Report,
1989 Commentary Section:  available from Dr. Frederick Meyers,
Univ. of California, San Francisco.
11 Dr. Donald Tashkin, "Is Frequent Marijuana Smoking Harmful
to Health?" Western Journal of Medicine  158#6: 635-637 (June
1993).
12 Michael Polen, Stephen Sidney, Irene Tekawa, Marianne
Sadler and Gary Friedman, "Health Care Use by Frequent
Marijuana Smokers Who Do Not Smoke Tobacco," Western
Journal of Medicine  158#6: 596-601 (June 1993).
13 Willard Manning, Emmett Keeler, Joseph Newhouse, Elizabeth
Sloss , and Jeffrey Wasserman, "The Taxes of Sin:  Do Smokers
and Drinkers Pay Their Way?" JAMA  261:1604-9 (March 17,
1989).
14 TC Wu, D Tashkin, B Djahed and JE Rose, "Pulmonary hazards
of smoking marijuana as compared with tobacco," New England
Journal of Medicine 318: 347-51 (1988).
15 Peter Passell, "Less Marijuana, More Alcohol?"  New York
Times, June 17, 1992 p. C2.
16 D. Gieringer, "Marijuana, Driving, and Accident Safety,"
Journal of Psychoactive Drugs 20 (1): 93-102 (Jan-Mar 1988).
17 Dr. Carl Soderstrom et al., "Marijuana and Accidents:  Use
Among 1023 Trauma Patients," Archives of Surgery , 123: 733-
37 (June 1988).  Conceivably, alcohol may be a greater risk
factor in traffic accidents because it promotes speeding, whereas
pot smoking-drivers tend to slow down.  On the other hand,
marijuana may be more involved in other kinds of accidents
where forgetfulness or loss of concentration are a risk factor.
18 In Bengal in 1892-3, excise taxes and licensing fees on ganja
totaled more than 10 rupees per ser (i.e., kilo), over one-half the
average retail price of 20 rupees.   This appears to have
represented a 10-fold increase over the free-market price of
cannabis, which sold for as little as 2 rupees in other provinces
where it was lightly taxed.  Report of the British Indian Hemp
Drugs Commission, Vol. 1, Ch. XV p.295  and Ch. XVI pp. 311-2,
p.321.  The U.S. cigarette tax has historically  accounted for about
25%-50% of retail prices, according to the Tobacco Institute (op.
cit.).
19 Among 18-25 year-olds, four-sevenths of daily users
reported being multiple daily users, according to NIDA in its
National Survey of Drug Abuse: Main Findings 1982.
20 M. Kleiman,  Marijuana: Costs of Abuse, Costs of Control,  pp.
38-9.
21 Peter Reuter, "Prevalence Estimation and Policy Formulation,"
Journal of Drug Issues, Vol 23, No. 2, 1993:  p 173.
22A.C.M. Jansen, op. cit.,  p. 59.
23 Report of the Indian Hemp Drugs Commission, Vol. 1, Chap.
XVI, p. 312.
24 This assumes 1000 joints to the kilo, or 3% potency for Indian
ganja.
25 Jansen, op. cit. p. 64
26 "Drug Use in California, 1989-1990," California Legislative
Analyst's Office, Sacramento.