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Predict what would happen to the equilibrium price of marijuana if it were legalized

Introduction

Both the demand and supply would increase. Since marijuana is currently illegal, this has restricted its supply. You can spend a lot of time in jail if you're caught with more than a few ounces in most states. If it were legalized, the supply might double or triple or quadruple. Demand, too, would rise, because many potential users are either afraid to buy an illegal substance, don't know where they can buy it, or don't want to engage in what might be construed as a criminal activity. However, price of marijuana would decrease following legalization. Price is an important determinant of marijuana consumption; this is contradictory to the general perception of consumption to be price-inelastic. Price is an important determinant of marijuana consumption; this is contradictory to the general perception of consumption to be price-inelastic.

Discussion

For occasional smokers of marijuana, gross and net price elasticities are expected to be the figures of -0.3 and -0.1; whereas, for frequent users, gross and net price elasticities are expected at -0.6 and -0.4. The net elasticity figures are arrived at by excluding the effects of legalization (Clements and Daryal).

Consumption of marijuana involves the risk of being caught and subsequently the risk of fines and/or imprisonment. Hence its net cost should be considered as a sum of its cost in conventional money terms and the expected “other costs”. Legalization eliminates this component of “other cost” which thus comes down to zero. The net cost, as a result, falls causing a shift towards the right in the demand curve (Johnston et al.).

Legalization would also result in a drop in the price of marijuana because new suppliers will definitely enter the market because of high profits. The change in ...