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Jack Doherty
Microeconomics - Yarti Deonaran
September 30, 2014

Economics of Marijuana in the USA

Millions of people across America, and even around the world, use marijuana everyday,
but what exactly is it? The National Institute on Drug Abuse defines marijuana as the dried
leaves, flowers, stems, and seeds from the hemp plant Cannabis sativa, which contains the
psychoactive (mind-altering) chemical delta-9-tetrahydrocannabinol (THC), as well as other
related compounds(NIDA). Marijuana, frequently referred to as weed or cannabis, is the most
common illicit drug used in the United States. It is often frowned upon mainly because it is still
illegal in a majority of the country. Cannabis activists from all around the US have been fighting
for legalization of the drug for years. Their main argument is that marijuana is actually a much
less dangerous drug than alcohol and tobacco, which are both legal. About 50,000 people die

each year from alcohol poisoning, and there are over 400,000 deaths a year attributed to tobacco
smoking. On the other hand, marijuana is considered non-toxic and cannot cause death from an
overdose. Because many states have yet to pass laws for legalization, only a small percentage of
marijuana is sold legally through licensed dispensaries run by state governments. The rest is sold
illegally on the streets, which is where the real dangers of marijuana arise. More and more states
are passing laws to decriminalize marijuana and to allow its medicinal use. Recent progress in
legalizing marijuana in the United States has created an opportunity to develop new marijuana
market. Colorado and Washington are the only two states to legalize the previously banned drug
for recreational use; meaning that anyone ages 21 and over can purchase and use marijuana
without breaking the law. These two states will provide a home for the start of an industry that is
predicted to produce a revenue that ranges from $10 billion to $100 billion (CNBC).
Many of the economic terms we learned in class are applied everyday in the legal
marijuana market. Because it is a brand new market, the marijuana industry is as close to a
perfectly competitive market as one can get. A perfectly competitive market contains buyers and
sellers that trade identical products so that each buyer and seller is a price taker. There are no
firms large enough to have market power to set the price of a certain product. The quantity
supplied is the amount of a product the producer are willing and able to sell at a certain price and
time, ceteris paribus1. Price elasticity of supply is how a products supply responds to changes in
price for that good. The supply of marijuana is fairly inelastic because supply is not affected by
changes in price. Another very important factor in any economic market is the quantity
demanded. The quantity demanded is the amount of a good or product in which buyers are able
and willing to purchase at a particular price and at a particular time, ceteris paribus. The price
elasticity of demand refers to how the demand of a good responds with a change in price of that
good. The demand of marijuana is fairly inelastic because a change in price does not change the
quantity demanded of the product. Another important type of elasticity is the income elasticity of
demand. This refers to how a change in consumers income affects the quantity demanded of a
product. Marijuana has a fairly inelastic demand, so the demand does not substantially change
when the consumers income changes. A demerit good is a product that can damage or harm the
consumer of the good. Marijuana is often considered a demerit good because it can impair the
users judgement and cause harm if not used correctly.
1 Ceteris Paribus - assuming all other factors remain unchanged

Marijuana is the third most commonly used drug in the United States, behind alcohol and
tobacco. According to norml.org, roughly 100 million Americans have used marijuana in their
lifetime. Of those people, 25 million have used it in the past year, and 14 million to claim use the
drug on a regular basis (NORML). Despite its vast popularity, possession of marijuana is still a
criminal offense in more than half of the 50 United States. This means that people in those states
could face prison time if found with just a small amount of marijuana. The debate of legalizing
the drug has been on the rise for decades and has recently been successful in several states.
Colorado and Washington are currently the only two states that have legalized the recreational
use of marijuana, following electoral votes in 2012. California and Oregon held similar ballots in
2012 that just barely failed (NORML). There are also a total of 18 states that have decriminalized
marijuana, so possession of small amounts are not punishable in court and usually results in a
small fine. Some of the states that decriminalized have also passed laws that legalize the medical
use of marijuana. There are 23 states in total that passed laws to allow medicinal use, starting
with California in 1996 (ProCon.org). This means that with a doctors prescription, patients can
legally possess and use medical marijuana purchased from a licensed dispensary2. The medical
marijuana is sold and grown at dispensaries by vendors that run a their own business. Vendors
must follow certain regulations that vary by state when growing and selling the product. To
purchase medical marijuana from a licensed dispensary, the buyer must present a medical card.
The medical card is prescribed by a doctor and gives the patient permission to use medical
marijuana to treat their sickness or disorder. Modern research shows that medical marijuana can
be used to treat a wide range of clinical applications. This includes pain relief from nerve
damage, nausea, spasticity, glaucoma, and movement disorders. Marijuana is also an appetite
stimulant, and is used to treat people with HIV, AIDS, and dementia (NORML). Legalizing
medical marijuana provides health benefits to those who need it while creating a market that
could boost the economy greatly.
The states that have already passed laws allowing the use of medical marijuana have been
very successful in making money and creating job opportunities. IBIS World conducted a
Medical Marijuana Growing market research report to see how successful the medical marijuana
market has been. They combined data from each state with legal medical cannabis to get an
overall picture of the medical marijuana industry in the United States. IBIS World found that
2 dispensary - a business that legally sells medical marijuana

there are about 1.5 million businesses, or dispensaries, that distribute medical marijuana in the
US. Those businesses combined generate a revenue of over 2 billion dollars. Not only does the
industry provide a substantial profit, but it is also rapidly growing. From 2009 to 2014, the
medical marijuana industry has grown 16.2% each year (IBIS). This increase in market size
gives support to the claims that the medical marijuana industry provides excellent economic
opportunity. IBIS Worlds
research report also mentioned
that the four largest firms
account for less than 10% of
the overall revenue. This
means that no businesses have
market power over one
another, making the medical
marijuana industry a perfectly
competitive market. Demand
for the product is on a huge
increase, and the predictions
for the future of the medical
marijuana industry are looking
more positive each day.

The number of states attempting to legalize is on a steady increase because people

recognize the economic opportunity that a cash crop like marijuana could bring to the market
when distributed legally. Legalizing marijuana for either medicinal or recreational would bring
the marijuana industry to that state. The market would be much larger in a state that allows
recreational use, mainly because anyone over 21 can walk into a dispensary and buy it. Unlike
medical marijuana, you do not need to go through the process of getting a medical card from the
doctor to purchase the
drug legally. Having a
much larger consumer
population would
indicate that the quantity
of both demand and
supply for marijuana
would be much higher in
those states that have a
larger marijuana market,
such as Colorado or
Washington. The graph
to the right shows the
supply and demand of
marijuana in a state that
has legalized recreational marijuana.
As shown in the graph above, the demand curve has a steep slope because it is fairly
inelastic. The demand of marijuana will not substantially change when there is a change in price.
The demand is also on the shifted to the right side of the graph because it has increased. Demand
for marijuana will be much higher in a state that has legalized recreational use than a state that
has not. The supply curve on the graph has a gradual slope because the supply of marijuana is
also inelastic. A change in price will not greatly affect the quantity supplied. The supply curve is
shifted to the right to indicate an increase in supply. The quantity supplied will be noticeably
higher in a state that legalizes recreational marijuana, opposed to a state that does not.

The medical marijuana market will not have as many consumers as the recreational marijuana
market because a medical card must be prescribed to the patient, which takes extra time and
money. This results in a slightly lower demand and supply for the product, though it is still high.
The graph below shows the demand and supply of the medical marijuana market in a state that

has legalized medicinal use.

The demand curve of medical marijuana has a steep slope because it is fairly inelastic. A
change in price of marijuana will not change the quantity demanded because people will
continue to buy the good, especially if they are prescribed to it. Compared to the demand on the
graph of recreational marijuana, the medical marijuana demand curve is shifted slightly to the
left because the demand is not as high when there are less consumers, though it is still fairly
high. The graph also shows that the quantity supplied is fairly inelastic. The quantity supplied
will remain about the same even if there is a change in price. The quantity supplied for medical
marijuana is high, but it is slightly lower than the quantity supplied in the recreational marijuana
market, which is why it appears to be shifted slightly to the left. Compared to the first graph
(recreational use) the equilibrium price of medical marijuana is about the same, but the quantity
is lower.

States with marijuana prohibition laws do have a supply and demand in their market, but
all trade of the good is illegal. Money made during illegal sales that occur in these states do not
impact the economy because all of the money and transactions are kept hidden from authorities.
The government is not able to tax this money, so it has no purpose in the market therefore no
economic value. Unfortunately, the illegal marijuana market indirectly impacts the economy in a
negative way. Research done by economists indicate that state and federal government spends an
average of $20 billion per year on enforcing laws for marijuana prohibition. Recent legalization
efforts are starting to cut that number down, but it is still a large amount of money. Legalizing
marijuana throughout the country would save the government that annual $20 billion instantly,
even before taxes and revenue from the new marijuana market are taken into account. The graph
below shows the predicted supply and demand of the illegal marijuana market in states that still
prohibit marijuana.

States with banned marijuana laws do not have a properly functioning market because it
is illegal, but there are still demand and supply for the product. The demand is still fairly
inelastic, and a change in price will not usually affect the quantity demanded. The demand curve
is shifted to the left compared to the first two graphs because the demand is lower. There is a
lower demand because people are taking a risk and breaking the law by possessing marijuana,

resulting in a smaller number of consumers. The quantity supplied is fairly inelastic, so a change
in price will not greatly change the quantity supplied. Compared to the previous two graphs
(recreational and medical use) the supply curve has shifted to the left. This indicates that supply
is lower, mainly because marijuana is illegal in that state. Despite the laws against it, the
equilibrium price of marijuana in banned states is about the same as the price in states with
recreational or medical use, though the quantity of the product is far less.

Both of the graphs above show the impact that legalizing marijuana in a new state brings
to the market. When a new state passes laws to legalize marijuana, the amount of consumers will
immediately increase. In the left graph the demand curve shifts to the right, indicating an
increase in quantity demanded. An increase in demand occurs because marijuana is now legal to
possess and buy, so consumers do not risk breaking the law by having marijuana. The increase in
demand will raise the equilibrium price and the quantity. The graph on the right shows a shift to
the right in the supply curve, indicating an increase in quantity supplied. Supply increases
because they must meet the increase in consumer population and demand that comes from recent
legalization. The increase in quantity supplied will bring the equilibrium price back down and

will increase the quantity even more. When a new state legalizes marijuana, the size of the
market sees a large increase with the rise of demand and supply.
CNBCs article How Big is the Marijuana Market?, by Ariel Nelson, researched the
idea of how successful the marijuana market will be; if marijuana is completely legalized in the
whole of the United States. Nelson interviewed expert economists that looked at past and current
marijuana statistics to determine models that estimate the supply and demand of the future
marijuana market. Most of the One person they interviewed was Harvard economist Jeffrey
Miron. Miron conservatively sizes the market at about $14 billion and in his February 2010
paper on "The Budgetary Implications of Drug Prohibition" states that legalization of marijuana
could yield over $20 billion in tax revenues and enforcement cost savings. (CNBC). The article
explained that the majority of demand-based studies estimate the market to produce a revenue of
$10 billion to $40 billion. With price variables and sensitivity analysis to consumption, some
models have predictions that go as high as $100 billion.
CNBC and Nelson also conducted studies to make supply-sided models to
estimate the size of the market. Doctor John Gettman, a professor at George Mason University,
used the DEAs data among other sources to estimate that there are on average, annual domestic
marijuana crop totaled some 65 million plants at a weight of 22 million pounds (10,000 metric
tons)(CNBC). The market value of that much marijuana is estimated to be worth about $120
billion. The supply based models were on average higher than the demand-side models. Based on
the different averages and sources, CNBC predicts that the marijuana market will produce a
annual revenue of $35 billion to $45 billion. This would leave the government with $16-$20
billion per year in tax revenue. This would make marijuana the third highest grossing demerit
good, just behind tobacco ($75 bil) and alcohol ($188 bil).
CNBC and a variety of other sources provided me with insight into the future of the
marijuana industry. Even with the wide range of estimates given, it is undeniable that if
legalized, marijuana has substantial economic value. Marijuana might be exactly the type of cash
crop that could boost the struggling US economy. Legalization efforts are at their highest in
recent history all around the United States, but do you think marijuana should be legalized?

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Works Cited
Nelson, Ariel. "How Big Is The Marijuana Market?" CNBC. CNBC, Apr.-May 2010. Web. 29
Sept. 2014.
"DrugFacts: Marijuana." National Institute on Drug Abuse (NIDA). N.p., Jan. 2014. Web. 29
Sept. 2014.
"About Marijuana." NORML.org - Working to Reform Marijuana Laws. NORML, n.d. Web. 30
Sept. 2014.
"Medical Marijuana Growing in the US: Market Research Report." IBIS World. N.p., May 2014.
Web. 30 Sept. 2014.

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Mankiw, N. Gregory. Principles of Microeconomics. Mason, OH: Thomson/South-Western,

2004. Print.