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Legal Pot: The Economic Case

Written By Geoffrey Pike

Posted November 10, 2015

I previously made my case for the legalization of cannabis. It is a liberty issue more than anything else. But what are the economic impacts of legalization?

In the United States, Colorado is currently the best example of marijuana legalization. The state government there has seen substantial increases in tax collections due in large part to excise taxes on marijuana. We also have to consider that the change in law has drawn in some people from out of state, who in turn spend money on marijuana, along with a good midnight snack.

Joking aside, it is hard to say how much of this is because marijuana isn’t legal in most other states. It is also hard to say how much the newness factor comes into play.

One of the arguments against legalization is that the usage will spike up. Initially, this is likely to be true. Studies done on this subject show that usage does spike up when marijuana becomes legal where it previously was not. People are curious beings by nature. There will be some people who want to try it just to see what all of the fuss is about.

The same studies also show that the usage tends to go back down after the initial spike. The newness becomes old. People satisfy their curiosity and they go on living their life as before. It usually is about the same percentage of people who smoke marijuana on a regular basis as before when it was illegal.

The point is that all of the new money coming into the Colorado state government may not last. It also won’t help as other states legalize.

Politicians in state legislatures around the country are seeing the increased tax collections in Colorado. They are licking their chops for more money and many of them will end up going along with legalization just for that.

The increased taxes going to state governments can be an argument for or against legalization. Many proponents of legalization use it as an argument. Personally, I don’t really want government at any level to have more money to spend because they already take enough. If there are cuts in taxes in other areas, then this would be beneficial.

It will be interesting to see the trend in Colorado. Will the extra money be used to ramp up government spending or to cut taxes in other areas? My guess is that it will be a combination of the two.

In terms of taxation and use of resources, we must also consider that legalization means that fewer resources will be required to put people in front of courts and to hold people in prison. When you don’t arrest sellers and users of marijuana, then it means that government spending can be reduced or resources diverted to something else — hopefully something that involves actual criminals.

Many areas already have severe overcrowding in jails and backed up cases in court. Legalizing marijuana will only help this situation.

Hemp and Other Uses

When we talk about the economics of legalization, we really need to focus on everything. Marijuana use itself is not the only result of legalizing cannabis.

Hemp is a product derived from the same plant species as marijuana. In the United States, hemp production is essentially illegal under federal law, even though hemp itself contains little THC, which is the chemical in marijuana that gets people high. This just shows the ridiculousness of the laws. This is cronyism and has nothing to do with protecting people from themselves. It limits our economic freedom.

When you consider all of the products that we are being deprived of, it is easy to understand the economic benefits of legal cannabis, particularly with hemp. This is also one of those things where it is very difficult to measure. Looking at GDP statistics aren’t going to help us.

Just take smartphones as a simple example. When someone buys a smartphone, it will get reflected in GDP statistics. But this is mostly meaningless because it is not telling us how much happiness people are deriving from the product.

If smartphones didn’t exist, we don’t know what people would have used that extra money for. But smartphones do exist now and the majority of people decide it is worth their money to have one. For this reason, we are generally much better off for having this product available.

The same would go for hemp and all of its uses. Think of all of the choices in clothes, paper products, biofuels, rope, and so many other products that we may be missing out on. We don’t really know all that is possible until it is fully legalized and the marketplace figures it out.

As with any product, when you lift restrictions and allow free people to have more choices, then this improves living standards. And when it comes to economics, free choice and living standards are really what matter the most. It isn’t some GDP statistic that makes you happy.

Medical Marijuana

Even medical marijuana has a major economic impact. Just as with the use of hemp, more choice and freedom means a higher quality of life. This is actually an economic benefit.

Of course, if medical marijuana helps someone live longer or have a higher quality of life by feeling better, how can you get a bigger economic impact that this?

The other major factor we have to consider with medical marijuana is its impact on traditional medicine. What if more people try marijuana for medicinal uses for diseases such as cancer? What if people find success in using marijuana as a replacement for expensive drugs?

Some medical providers and pharmaceutical companies may not like this very much. In fact, they might find it in their own interest to argue against medical marijuana.

Now it is true that some in the medical industry could be hurt by success stories in the use of medical marijuana. But we have to make sure that we use good economics in our analysis.

The overall economic impact is positive if people find marijuana as being cheaper and more effective than traditional drugs. It may hurt the bottom line of some major drug companies, but it will help the bottom line of many individuals struggling with health issues.

Again, if people are making a voluntary choice to use a product, it is because they deem themselves better off. They are willing to trade their money for the product.

Your Economic Impact

The main beneficiaries of cannabis legalization are consumers. More choice is always beneficial.

This isn’t to say there won’t be other beneficiaries too. Those opening up marijuana shops will likely benefit. Some farmers would benefit if widespread growing were allowed.

Even if you have no interest in growing cannabis, or selling marijuana, or using marijuana, or even using hemp products, you still may find a benefit in seeking investments in the industry.

Regardless, we should cheer whenever our fellow human beings have more choices in life. When people have a better standard of living and better quality of life, it benefits us all. It is hard to measure this with statistics. It is all about what we have available to us.

There are positive and negative economic impacts from cannabis legalization. But there is little doubt that the positives far outweigh any negatives.

Cannabis should be legalized not just for pure liberty reasons, but also for more economic freedom.