After Canada became the first developed country to entirely legalise recreational marijuana in October 2018, many other countries around the world followed suit in relaxing rules on the use of the drug. Although there have been many research papers written on the health impact of cannabis, only recently have we started to see a more detailed analysis of the economic implications surrounding it.
Without a doubt, cannabis is becoming a big industry. The Canadian retail market alone is estimated to be worth between US$5 billion to $9 billion – with companies such as Canopy Growth and Aurora Cannabis leading the way. Further afield, the legal American retail market was valued at $8.5 billion in 2017, with estimates reaching as high as $23.4 billion by 2022.
As a result of this, the potential federal tax revenues that could be garnered from the industry are a primary economic attraction for legalisation. The estimated tax revenue from full legalisation in America is estimated to be $131.8 billion for the period 2017 to 2025 – a hugely compelling additional source of government revenue to alleviate budget deficits. Moreover, on a smaller level, the collection of state taxes is a useful addition for government spending on infrastructure. We only have to look at the $135 million that Colorado state received in 2015 from marijuana taxes, which directly contributed to high-speed internet and multi-modal mass transit projects, to see how tax revenue can be put to use.
In addition to tax revenue, increased employment is another positive from legalising the drug. Not only does the industry offer the promise of direct employment via farming, processing and distributing, but also ancillary businesses such as software, lending services, and construction. Estimates show that through 2025, 1.1million of these kinds of jobs would be added to the US jobs market.
Another possible gain is that government expenditure on law enforcement would be reduced. In legalising marijuana, the number of court cases, trials, and imprisonments for drug offences would fall by up to three-quarters – freeing up resources to combat more serious narcotics cases.
However, while the benefits appear at first blush to be attractive, there have also been major problems with the legalisation experience.
The economic benefits (if they exist at all) are short-term and may quickly dissipate. In many areas that have legalised marijuana, supply has flooded the market. For example, Colorado has seen prices plummet 70% over the past four years. This has resulted in the all-important tax revenue being substantially eroded. Moreover, the Democrat’s spending plans project that California state will make $355 million in marijuana excise duties by the end of June – half of what was expected when sales commenced last year. The reason for the downgrade is due to consumers continuing to use informal transactions even after legalisation. Reports show that over one-third of cannabis users stick with their street dealers, despite access to new ‘medicinal shops’. In both scenarios, tax revenue that is being chased by governments may never eventuate.
Finally, the social problems of legalisation tie into the economics of the matter. In smoking marijuana there is a loss of worker productivity, increased hospital admittance (often due to the connection between marijuana and alcohol use), greater numbers of high school dropouts, and increased traffic accidents. Studies show that 29% of users say they have driven a motor vehicle under the influence of drugs (DUI). The cost of these cases is in excess of $25 million. In fact, ‘for every dollar earned in tax revenue, Coloradans are estimated to have spent approximately $4.50 to mitigate the effects of legalisation’. Thus it is right to question whether legalisation has a net positive impact.
Even though Canada has pioneered the move into the cannabis market, many countries are still hesitant in chasing the idea. Overall, the economic benefits of legalisation have been witnessed – hence the new policy is seen as a trend. However, the full extent of the positives and negatives are yet to materialise. Is the grass greener? We will have to wait and see.