IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v216y2023icp62-101.html
   My bibliography  Save this article

Weeding out the dealers? The economics of cannabis legalization

Author

Listed:
  • Auriol, Emmanuelle
  • Mesnard, Alice
  • Perrault, Tiffanie

Abstract

We model consumer choices for recreational cannabis in a risky environment and its supply under prohibition and legalization. While legalization reduces the profits of illegal providers, it increases cannabis consumption. This trade-off can be overcome by combining legalization with sanctions against the black market, and improvements to the quality of legal products. Numerical calibrations highlight how a policy mix can control the increase in cannabis consumption and throttle the illegal market. In the US, the eviction prices we predict to drive dealers out of business are much lower than the prices of legal cannabis in most of the states that opted for legalization, leaving room for the black market to flourish. Analyzing the compatibility of several policy goals sheds light on the less favorable outcomes of recent legalization reforms and suggests a new way forward.

Suggested Citation

  • Auriol, Emmanuelle & Mesnard, Alice & Perrault, Tiffanie, 2023. "Weeding out the dealers? The economics of cannabis legalization," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 62-101.
    • Handle: RePEc:eee:jeborg:v:216:y:2023:i:c:p:62-101
    DOI: 10.1016/j.jebo.2023.09.027
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268123003505
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2023.09.027?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pacula Rosalie Liccardo & Kilmer Beau & Grossman Michael & Chaloupka Frank J, 2010. "Risks and Prices: The Role of User Sanctions in Marijuana Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-38, February.
    2. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    3. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    5. van Ours, Jan C. & Williams, Jenny, 2007. "Cannabis prices and dynamics of cannabis use," Journal of Health Economics, Elsevier, vol. 26(3), pages 578-596, May.
    6. Michael R. Caputo & Brian J. Ostrom, 1994. "Potential Tax Revenue from a Regulated Marijuana Market A Meaningful Revenue Source," American Journal of Economics and Sociology, Wiley Blackwell, vol. 53(4), pages 475-490, October.
    7. Andreas Glöckner & Tilmann Betsch, 2008. "Do People Make Decisions Under Risk Based on Ignorance? An Empirical Test of the Priority Heuristic against Cumulative Prospect Theory," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2008_05, Max Planck Institute for Research on Collective Goods.
    8. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    9. Dragone, Davide & Prarolo, Giovanni & Vanin, Paolo & Zanella, Giulio, 2019. "Crime and the legalization of recreational marijuana," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 488-501.
    10. Nicholas Barberis & Abhiroop Mukherjee & Baolian Wang, 2016. "Prospect Theory and Stock Returns: An Empirical Test," The Review of Financial Studies, Society for Financial Studies, vol. 29(11), pages 3068-3107.
    11. Ali Palali & Jan C. van Ours, 2015. "Distance to Cannabis Shops and Age of Onset of Cannabis Use," Health Economics, John Wiley & Sons, Ltd., vol. 24(11), pages 1483-1501, November.
    12. Jonathan P. Caulkins, 1993. "Zero-Tolerance Policies: Do They Inhibit or Stimulate Illicit Drug Consumption?," Management Science, INFORMS, vol. 39(4), pages 458-476, April.
    13. Jérôme Adda & Brendon McConnell & Imran Rasul, 2014. "Crime and the Depenalization of Cannabis Possession: Evidence from a Policing Experiment," Journal of Political Economy, University of Chicago Press, vol. 122(5), pages 1130-1202.
    14. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
    15. Poret, Sylvaine, 2009. "An optimal anti-drug law enforcement policy," International Review of Law and Economics, Elsevier, vol. 29(3), pages 221-228, September.
    16. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    17. Powell, David & Pacula, Rosalie Liccardo & Jacobson, Mireille, 2018. "Do medical marijuana laws reduce addictions and deaths related to pain killers?," Journal of Health Economics, Elsevier, vol. 58(C), pages 29-42.
    18. Hunt, Priscillia E & Pacula, Rosalie Liccardo & Weinberger, Gabriel, 2018. "High on Crime? Exploring the Effects of Marijuana Dispensary Laws on Crime in California Counties," IZA Discussion Papers 11567, Institute of Labor Economics (IZA).
    19. Evelina Gavrilova & Takuma Kamada & Floris Zoutman, 2019. "Is Legal Pot Crippling Mexican Drug Trafficking Organisations? The Effect of Medical Marijuana Laws on US Crime," The Economic Journal, Royal Economic Society, vol. 129(617), pages 375-407.
    20. Angela K. Dills & Sietse Goffard & Jeffrey Miron, 2017. "The Effects of Marijuana Liberalizations: Evidence from Monitoring the Future," NBER Working Papers 23779, National Bureau of Economic Research, Inc.
    21. Carrieri, Vincenzo & Madio, Leonardo & Principe, Francesco, 2019. "Light cannabis and organized crime: Evidence from (unintended) liberalization in Italy," European Economic Review, Elsevier, vol. 113(C), pages 63-76.
    22. Jeffrey A. Miron, 2003. "The Effect of Drug Prohibition on Drug Prices: Evidence from the Markets for Cocaine and Heroin," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 522-530, August.
    23. MacCoun,Robert J. & Reuter,Peter, 2001. "Drug War Heresies," Cambridge Books, Cambridge University Press, number 9780521799973.
    24. Glöckner, Andreas & Betsch, Tilmann, 2008. "Do people make decisions under risk based on ignorance? An empirical test of the priority heuristic against cumulative prospect theory," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(1), pages 75-95, September.
    25. Chang, Tom Y. & Jacobson, Mireille, 2017. "Going to pot? The impact of dispensary closures on crime," Journal of Urban Economics, Elsevier, vol. 100(C), pages 120-136.
    26. DiNardo, John & Lemieux, Thomas, 2001. "Alcohol, marijuana, and American youth: the unintended consequences of government regulation," Journal of Health Economics, Elsevier, vol. 20(6), pages 991-1010, November.
    27. Liana Jacobi & Michelle Sovinsky, 2016. "Marijuana on Main Street? Estimating Demand in Markets with Limited Access," American Economic Review, American Economic Association, vol. 106(8), pages 2009-2045, August.
    28. Mireille Jacobson, 2004. "Baby Booms and Drug Busts: Trends in Youth Drug use in the United States, 1975–2000," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(4), pages 1481-1512.
    29. Brinkman, Jeffrey & Mok-Lamme, David, 2019. "Not in my backyard? Not so fast. The effect of marijuana legalization on neighborhood crime," Regional Science and Urban Economics, Elsevier, vol. 78(C).
    30. Adam J. Davis & Karl R. Geisler & Mark W. Nichols, 2016. "The price elasticity of marijuana demand: evidence from crowd-sourced transaction data," Empirical Economics, Springer, vol. 50(4), pages 1171-1192, June.
    31. Ali Palali & Jan C. van Ours, 2015. "Distance to Cannabis Shops and Age of Onset of Cannabis Use," Health Economics, John Wiley & Sons, Ltd., vol. 24(11), pages 1483-1501, November.
    32. Adda, Jérôme & McConnell, Brendon & Rasul, Imran, 2014. "Crime and the depenalization of cannabis possession: evidence," Economics Working Papers ECO2014/05, European University Institute.
    33. Andrew Resignato, 2000. "Violent crime: a function of drug use or drug enforcement?," Applied Economics, Taylor & Francis Journals, vol. 32(6), pages 681-688.
    34. Robert J. Barro, 2003. "Nothing is Sacred: Economic Ideas for the New Millennium," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524155, December.
    35. Jeffrey A. Miron & Jeffrey Zwiebel, 1995. "The Economic Case against Drug Prohibition," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 175-192, Fall.
    36. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
    37. Goodhart, Charles & Ashworth, Jonathan, 2019. "Canadian Legalization of Cannabis reduces both its cash usage and ‘Black’ Economy," CEPR Discussion Papers 13448, C.E.P.R. Discussion Papers.
    38. Gary S. Becker & Kevin M. Murphy & Michael Grossman, 2006. "The Market for Illegal Goods: The Case of Drugs," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 38-60, February.
    39. van Ours, Jan C, 1995. "The Price Elasticity of Hard Drugs: The Case of Opium in the Dutch East Indies, 1923-1938," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 261-279, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2024. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," CRC TR 224 Discussion Paper Series crctr224_2024_501, University of Bonn and University of Mannheim, Germany.
    2. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2023. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," Rationality and Competition Discussion Paper Series 487, CRC TRR 190 Rationality and Competition.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Auriol, Emmanuelle & Mesnard, Alice & Perrault, Tiffanie, 2019. "Defeating Crime? An Economic Analysis of Cannabis Legalization Policies," CEPR Discussion Papers 13814, C.E.P.R. Discussion Papers.
    2. Carrieri, Vincenzo & Madio, Leonardo & Principe, Francesco, 2020. "Do-It-Yourself medicine? The impact of light cannabis liberalization on prescription drugs," Journal of Health Economics, Elsevier, vol. 74(C).
    3. Bruijn, L. Michelle & Ribas, Rafael P., 2022. "“No drugs in my back yard:” The ambivalent reception of cannabis retailers," Journal of Economic Behavior & Organization, Elsevier, vol. 199(C), pages 103-121.
    4. Anderson, D. Mark & Rees, Daniel I., 2021. "The Public Health Effects of Legalizing Marijuana," IZA Discussion Papers 14292, Institute of Labor Economics (IZA).
    5. Carrieri, Vincenzo & Madio, Leonardo & Principe, Francesco, 2019. "Light cannabis and organized crime: Evidence from (unintended) liberalization in Italy," European Economic Review, Elsevier, vol. 113(C), pages 63-76.
    6. Ali Palali & Jan C. van Ours, 2015. "Distance to Cannabis Shops and Age of Onset of Cannabis Use," Health Economics, John Wiley & Sons, Ltd., vol. 24(11), pages 1483-1501, November.
    7. Carlos Casacuberta & Mariana Gerstenblüth & Patricia Triunfo, 2012. "Aportes del análisis económico al estudio de las drogas," Documentos de Trabajo (working papers) 0112, Department of Economics - dECON.
    8. Ali Palali & Jan C. van Ours, 2015. "Distance to Cannabis Shops and Age of Onset of Cannabis Use," Health Economics, John Wiley & Sons, Ltd., vol. 24(11), pages 1483-1501, November.
    9. Xiuming Dong & Justin Tyndall, 2021. "The Impact of Recreational Marijuana Dispensaries on Crime: Evidence from a Lottery Experiment," Working Papers 2021-1, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    10. Dragone, Davide & Prarolo, Giovanni & Vanin, Paolo & Zanella, Giulio, 2019. "Crime and the legalization of recreational marijuana," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 488-501.
    11. Edward M. Shepard & Paul R. Blackely, 2010. "Economics of Crime and Drugs: Prohibition and Public Policies for Illicit Drug Control," Chapters, in: Bruce L. Benson & Paul R. Zimmerman (ed.), Handbook on the Economics of Crime, chapter 10, Edward Elgar Publishing.
    12. Caulkins, Jonathan P. & Reuter, Peter, 2006. "Illicit drug markets and economic irregularities," Socio-Economic Planning Sciences, Elsevier, vol. 40(1), pages 1-14, March.
    13. Manolis Galenianos & Alessandro Gavazza, 2017. "A Structural Model of the Retail Market for Illicit Drugs," American Economic Review, American Economic Association, vol. 107(3), pages 858-896, March.
    14. Cheng, Stephanie F. & De Franco, Gus & Lin, Pengkai, 2023. "Marijuana liberalization and public finance: A capital market perspective on the passage of medical use laws," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    15. Lucas Marín Llanes & Hernando Zuleta, 2022. "Myths of drug consumption decriminalization: effects of Portuguese decriminalization on violent and drug use mortality," Documentos CEDE 20328, Universidad de los Andes, Facultad de Economía, CEDE.
    16. A. Ramirez-Hassan & C. Gomez & S. Velasquez & K. Tangarife, 2023. "Marijuana on Main Streets? The Story Continues in Colombia: An Endogenous Three-part Model," Papers 2306.10031, arXiv.org.
    17. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    18. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    19. Huber III Arthur & Newman Rebecca & LaFave Daniel, 2016. "Cannabis Control and Crime: Medicinal Use, Depenalization and the War on Drugs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(4), pages 1-35, October.
    20. Mike Langen & Erdal Aydin & Piet Eichholtz & Nils Kok, 2022. "Getting high or getting low? the external effects of coffeeshops on house prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(2), pages 565-592, June.

    More about this item

    Keywords

    Recreational cannabis; Legalization; Crime; Policy; Regulation;
    All these keywords.

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:216:y:2023:i:c:p:62-101. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.