With the legalization of substances like marijuana come not only changes to the law, but changes to the economy. For example, what can be expected of demand for marijuana as states legalize its use? Is there an outward shock in the demand and if so, is it a short-term or long-term shock? As laws change in the United States, we will see this scenario play out, but let's look at some of the common assumptions.
Legalization and Increased Demand
Most economists agree that with legalization, we can expect demand to increase in the short-term, as the penalties for being caught with marijuana go down (to zero) and marijuana should be easier to attain. Both of these factors suggest that in the short-term, demand should rise.
It's much harder to say what will happen in the long-run. I suspect that marijuana may appeal to some people precisely because it is illegal; humans have been tempted by the "forbidden fruit" since the time of Adam and Eve. It's possible that once marijuana has been legal for a period of time, it will no longer be seen as "cool" and some of the original demand will drop off. But, even as the cool factor may decrease, demand may continue to increase for any number of factors from an increase in the study of medicinal applications to availability and the increase in businesses catering to its recreational use.
What the Experts Say
That's my gut instinct on what would happen to demand under marijuana legalization. Gut instincts, however, are no replacement for serious study and evidence. Since I have not studied the subject in any great detail, the prudent thing to do would be to see what those who have studied it say. What follows is a sampling from a few different organizations.
The U.S. Drug Enforcement Agency believes that demand for marijuana would skyrocket if legalized:
Legalization proponents claim, absurdly, that making illegal drugs legal would not cause more of these substances to be consumed, nor would addiction increase. They claim that many people can use drugs in moderation and that many would choose not to use drugs, just as many abstain from alcohol and tobacco now. Yet how much misery can already be attributed to alcoholism and smoking? Is the answer to just add more misery and addiction? From 1984 to 1996, the Dutch liberalized the use of cannabis. Surveys reveal that lifetime prevalence of cannabis in Holland increased consistently and sharply. For the age group 18-20, the increase is from 15 percent in 1984 to 44 percent in 1996.
In a report titled "The Budgetary Implications of Marijuana Prohibition, Jeffrey A. Miron, a Visiting Professor of Economics at Harvard University felt that the quantity demand for marijuana after legalization would largely be determined by price; thus there would not likely be an increase in quantity demanded if the price stayed the same. He went on to say:
If the price decline under legalization is minimal, then expenditure will not change regardless of the demand elasticity. If the price decline is noticeable but the demand elasticity is greater than or equal to 1.0 in absolute value, then expenditure will remain constant or increase. If the price decline is noticeable and the demand elasticity is less than one, then expenditure will decline. Since the decline in price is unlikely to exceed 50% and the demand elasticity is likely at least -0.5, the plausible decline in expenditure is approximately 25%. Given the estimate of $10.5 billion in expenditure on marijuana under current prohibition, this implies expenditure under legalization of about $7.9 billion.
In another report, The Economics of Cannabis Legalization, the author, Dale Gieringer, suggests that the demand for marijuana would likely go up after legalization. However, he does not see this as negative, as it may cause some to switch from more harmful drugs to marijuana:
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.
Nobel Prize winner Gary Becker, however, is uncertain that demand for marijuana would increase under legalization:
I obviously do agree that legalization would likely increase drug use if it lowered prices of drugs- the quantity demanded of drugs also tends to decline as their price falls. That is why I did not assume a zero price elasticity, but used 1/2 as my estimate. However, whether legalization would increase quantity demanded at a given price is far less clear. Forces go in both directions, such as the desire to obey the law versus the desire to oppose authority.
In states where marijuana has been legalized for both medicinal and recreational use, it may still be too soon to tell what the long-term impact legalization will have on demand, but each state will serve as a case study into the factors that affect the new industry.