Weed? Pot? Ganja? These are familiar terms for some people, but less well known is the fact that marijuana sales account for more than $120 billion each year in tax revenue and create 1.6 million new jobs in the US alone. The legalisation of cannabis would see it officially become America’s largest cash crop and many people seem to be rooting for it, with only 8% of adults in the US saying that marijuana should be kept illegal in all circumstances. Is it time to legalise marijuana on a larger scale, and what would the economic impact be?  

Not only could legalising cannabis provide huge tax revenues for governments, but it could also prevent unnecessary government spending on prisons and criminal justice. In 2018, 40% of the 1.65 million drug arrests made in the US were for marijuana-related offences, with 92% of them for possession. It costs an estimated $35,000 a year to house an inmate in an American prison, with the US government spending $80 billion per annum to incarcerate 2.3 million people. The decriminalisation of marijuana could allow governments to focus expenditure on perhaps more pressing matters, as well as easing pressure on prison systems. 

From a macroeconomic perspective, the impact of the legalisation of cannabis on consumption, and therefore aggregate demand, depends largely on the size of the taxes applied by the government. We can use previous examples in Canada, where marijuana has been completely legalised since 2018, and the Netherlands, where marijuana has been decriminalised for personal use (but not legalised), to show this. In Canada, high taxes of around $9 per gram have allowed the black market (which produces a better quality, cheaper alternative) to continue to thrive. Although one may think this would increase consumption figures, the reality is that black market transactions are unrecorded and do not count towards aggregate demand, meaning that Canada has actually seen a very limited impact on officially recorded consumption expenditure. In the Netherlands however, taxes on marijuana are lower (although they are still sufficient to earn the Dutch government a reported €400 million a year in tax revenues), with the result that the black market is nowhere near as large. This means that most cannabis sales are legal and thus are included in official consumption and aggregate demand figures.

A large benefit of legalising marijuana is that it could lead to an increase in investment by providing greater access for cannabis companies to be involved in the production, distribution, and sale of the product. They could perhaps do this by listing their stocks on the various US exchanges, giving rise to many more investment opportunities in an industry that is proving increasingly popular with investors due to its strong growth potential. 

Additionally, the legalisation of marijuana could have a drastic effect on employment. There are already an estimated 320,000 Americans currently employed in the marijuana industry and, in 2019, the median salary in the industry in the US was $58,511, which is 10.7% higher than the US median salary. Legalisation could result in a significant expansion of employment in the cannabis industry, which in turn would increase spending on goods and services in the economy and tax revenues for the government. 

Marijuana is a proven drug for treating a wide variety of medical problems. Its medical use is already legal in 37 US states with a doctor’s recommendation, and it is used to treat conditions such as insomnia, Alzheimer’s, arthritis, PTSD, and diabetes. In May 2018, California had the highest number of medical marijuana patients in America at roughly 915,000. Many celebrities also support the use of medical marijuana. For example, Lady Gaga turns to cannabis to help her manage stress, and Pete Davidson uses it to help him deal with Crohn’s disease. In addition, legalising marijuana would likely decrease the cost of marijuana-based medical products, making it more affordable for consumers to purchase them.

However, whilst one might think that smoking pot has relatively little negative impact on their health, as it is a comparatively safe drug to use, its recreational use can lead to severe health problems; both physical and mental. For example, it can cause infertility, stroke, rapid lung destruction, and lung and testicular cancer, as well as schizophrenia, loss of memory and a decreased attention span. Another major issue concerning marijuana is that of addiction: in 2016, nearly 4 million people were addicted to marijuana, and this number would only increase if it were to be legalised. There is also a concern for its impacts on young people, as it is feared that there would be an increase in use and addiction amongst students, which would negatively impact their education. This could be a sizeable issue given that, in 2016, 6.5% of teenagers (aged 12-17) and 20.8% of young adults (aged 18 to 25) were already using marijuana in the US.

Overall, the experience of legalisation in Canada seems to have been a positive one.  The effect of fines, legal fees, court appearances, and missing workdays that were particularly burdensome for people from disadvantaged communities has been significantly reduced.  Employment in the sector has increased massively and the government has been receiving hundreds of millions of dollars in taxes. It is clear, however, that it is ultimately the way the industry is managed post-legalisation that is critical in determining the overall economic and social impact. The legalisation of marijuana is likely to remain a controversial subject in most countries for some time.