The Economic Harm of Prohibition

CANADA-POLITICS-HEALTH-DRUGS-MARIJUANAAccording to the United Nations, cannabis, the plant from which marijuana is derived, is the most widely used, produced and trafficked drug. Governments across the globe have invested heavily in fighting drug production and consumption. Notwithstanding, even though the war on drugs has increased cannabis seizures, data show that the drug’s availability in the market has also expanded while trends in consumption have remained stable.

In Canada, cannabis usage is estimated to be much higher than the world average of 2.8-4.5%. Furthermore, data indicate that 12.6% of Canadians, or about 4.39 million adults, have used cannabis at least once in the past year. The estimate for youth aged between 15 and 24 is 26.3%. Considering the size and breadth of the cannabis market, it is clear that prohibition has shuttered the Canadian government, like others worldwide, from an additional source of revenue at a time when cuts in benefits and investments are being used to balance the budget. However, the loss of tax revenues is not the only problem associated with the current policies: prohibition has kept the drug industry illegal and, subsequently, deregulated. This makes for risk-premiums that create a monopolized market with high barriers to entry, while, concomitantly, leading to increases in violence, organized crime and the diversion of limited government resources to prosecuting drug users (i.e. consensual, non-violent “crimes”).

Current policies have created substantial profits for drug dealers and producers. Stephen T. Easton (2004) estimates the retail price of a marijuana cigarette to be approximately $8.60 while costing around $1.50 to produce, yielding roughly a $7.10 profit. In a free market such a profit margin would be fleeting, as new entrepreneurs would be induced into the market, increasing drug supply while driving down its retail price. However, in the illegal market, such a profit has staying power because the possibility of facing jail time serves as a barrier to entry, creating an effective risk- premium for those who participate in the illegal production and sale of such substances.

To address fears of increases in consumption, cannabis could be legalized while maintaining the current retail prices. This would be done by transferring the risk- premium profits to the government by implementing a tax equivalent to the difference between the costs of production and current street prices. As Easton estimates, the consumption of marijuana in Canada is approximately 160,000 kilograms per annum, meaning that the suggested tax scheme would produce revenues of about $2 billion. Considering the 2012 budget plan, if the government were to use tax revenues from the sale of marijuana, by 2014-2015 it would have a budget surplus of $2.7 billion, instead of the current projection of a $1.3 billion deficit. This would allow for tax cuts in other areas. This isn’t necessarily a defense of high taxation, but rather an acknowledgement that a free-market style of legalization is not likely to happen soon.

Aside from permitting considerable mark-ups, prohibition gives greater flexibility to the drug industry and other advantages not enjoyed by regulated sectors. While legitimate Canadian businesses must comply with the rules imposed by trade agreements in order to garner free access to certain markets, the drug industry, as it is unregulated and illegal, pays no import duties. Drug pushers have tariff- free access to all markets. This, combined with no regulation, gives the industry greater malleability. The risks it faces are equal whether it sells pure or

contaminated drugs, providing the industry zero incentive to utilize quality control measures. The lack of regulation does not effectively impede selling to minors, while also placing no geographic borders on distribution. This creates an industry that pays no taxes, is open to all markets and faces no red tape. What other industry enjoys such advantages in Canada?

Meanwhile, as the drug industry profits, prohibition has led to the allocation of taxpayer money to fund the prosecution of consensual behavior, filling prisons with so-called non-violent offenders. Resources are not only used to find growing operations, but also to prosecute and penalize offenders. In 2011, there were 113,100 police-reported drug crimes, of which 54% were for cannabis possession. While there is contention about the dangers of addiction to cannabis and its harms in comparison to tobacco and alcohol, it seems that the greatest risk to cannabis users comes from government actions: on top of fines and prison terms, otherwise law-abiding citizens gain a criminal record, which affects future employment opportunities as well as one’s ability to travel and apply for citizenship internationally. Such repercussions are in direct contrast with efforts to increase general welfare and reduce social disparities.

In spite of all the evidence, the current government seems blind to the high costs of prohibition and the effects of its nanny state policies. Legalizing and regulating cannabis would float tax revenues to the government and ensure that quality control tools, sales restrictions and licenses are in place. This creates a sensible cannabis policy that reduces both the harms of cannabis use and of government policies. After all, it is only fair that all Canadian industries be subject to the same rules, and logical that citizens be allowed to live their lives as they see fit.

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2 Responses to “The Economic Harm of Prohibition”

  1. vangelv says:

    Does anyone else have a problem with the, “filling prisons with so-called non-violent offenders,” statement? If I want to buy pot and someone is willing to provide it we engage in a transaction that is clearly not violent so why muddy the waters with the use of the term, "so-called"? And since when is it good for the government to add more industries to regulate? Is Canada really starved for tax revenue or is the government spending much more than it should? My son, who did an analysis of this posting for his English assignment, argues that if Ms. Flister intended this commentary for the Mises Institute of Canada readers she may have failed somewhat but if she wants to use the Institute to reach the left, which opposes prohibition on principle but loves regulation she has hit it out of the park. While conservatives tend to usually oppose prohibition on principle they may have little trouble sacrificing that principle as they have sacrificed their other principles as they look to the extra source of revenue as the means to cut taxes elsewhere.

  2. Ukerry, first, I’m not sure you actually even understand what is written. Where in the post do I argue for ANYTHING other than LEGALIZING a consensual, non-violent action?
    As for the article supporting government control, it is an economic analysis. It presents options:
    "To address fears of increases in consumption, cannabis could be legalized while maintaining the current retail prices. This would be done by transferring the risk- premium profits to the government by implementing a tax equivalent to the difference between the costs of production and current street prices.”
    Again, do point where I state that the government SHOULD tax it. Maybe even though I am the author I can’t find this sentence but you can.
    I am happy to address any issues brought up by readers, as long as these are polite, intelligent conversations. I’m assuming you understand your post lacks quite a bit of this: "Instead of implementing a tax on it, why don't we just shoot anyone who smokes it, pretty soon the problem will be gone.”

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