ECONOMIC EFFECTS OF LEGALIZING MARIJUANA by David Glauser A Senior Honors Thesis Submitted to the Faculty of The University of Utah ABSTRACT Marijuana legalization would offer an important advantage over decriminalization in that it would allow for legal distribution and taxation of cannabis as well as decrease costly enforcement and incarceration expenses. Despite these costly enforcement efforts, marijuana is the most commonly used illicit drug in America. According to a survey done in 2008 by the National Institute of Drug Abuse, 42% of 12th graders in the United States have used marijuana at some point in their life. High demands for marijuana likely indicate that legalization of the drug would have an enormous effect on the American economy. In a time of economic recession and government debt of record proportions, it is extremely beneficial to look into the possible advantages and disadvantages of such legislation. By comparing different studies done by various organizations and departments as well as analyzing areas that have already legalized marijuana, such as the Netherlands, I was able to determine approximately how the economy would be affected on several different issues. Some figures that would be affected are: employment, the demand for marijuana, taxation rates and potential government revenue, incarceration and enforcement costs, and social issues such as rehabilitation programs. According to my research, the United States government would experience an increase of $25,963,686,520 towards their budget. In America, over the past three decades, we have witnessed a stormy and controversial debate about the possible results to society that might occur from decriminalizing or legalizing marijuana. Beginning with Oregon in 1973, a total of 12 states (Alaska, California, Colorado, Maine, Minnesota, Mississippi, New York, Nebraska, Nevada, North Carolina, and Ohio) have altered their existing laws to reduce the penalties for marijuana possession. Perhaps the most powerful and appealing argument for marijuana decriminalization is the effect that it would have on the economy and government budget. Legalization appears to be in the near future. A 2011 Gallup poll showed a record-high 50% of Americans now say the use of marijuana should be made legal. That is an increase from 46% in a similar poll from the year before. Gallup first held a poll on the issue in 1969 when only 16% of the population approved of legalization. (Newport, 2011) Marijuana, derived from the hemp plant called “Cannabis sativa”, is the most commonly used illicit drug in the United States (Mauer 2005). It is a dry, shredded green and brown mix of flowers, stems, seeds, and leaves that is usually smoked as a joint or in a pipe, although it can also be smoked in blunts, mixed in food, or brewed as tea. The main active chemical in marijuana is delta-9-tetrahydrocannibinol (THC). When someone inhales marijuana, THC rapidly passes from the lungs into the bloodstream, which carries the chemical to the brain and other organs throughout the body. The THC acts upon specific sites in the brain, called cannabinoid receptors, kicking off a series of cellular reactions that ultimately lead to the “high” that users experience when they use marijuana. Different areas of the brain have differing numbers of cannabinoid receptors, which explains why marijuana affects functions of the brain. Areas of the brain that influence pleasure, memory, thinking, concentration, sensory and time perception, and coordinated movement have the highest density of cannabinoid receptors. These effects are short term, usually lasting a few hours. A realistic concern associated with marijuana is whether or not users will become addicted. Like many of the health effects of marijuana use, there is no easy answer to this question. The large majority of people who try marijuana do so experimentally and never become addicted. Unlike other substances, cannabis has very few withdrawal symptoms and most people can quit rather easily. Any withdrawal symptoms are typically rare and minor but can include anxiety, depression, nausea, and sleep disturbances. Marijuana is especially un-addictive when compared to other substances. Marijuana is often times compared to drugs like alcohol, cocaine, and heroin. However, when discussing addiction, a much more appropriate comparison would be to caffeine. A health professional survey ranked the inherent addictive potential of numerous drugs on a 100-point scale. Nicotine recorded a 99 point rating, alcohol 81, caffeine 70, and marijuana 22. According to the Paul Gahlinger, who conducted the research, “Most marijuana users – even those with long-term, heavy use- experienced no withdrawal when they stop. Some people have reported generally mild symptoms” (Gahlinger 2004). Another study by Dr. Jann Gumbiner found that only about 8% of marijuana users develop a serious addiction, either psychological or physical (Gumbiner 2010). This is a relatively small number when compared to other drugs. The same study found that 32% of tobacco users will become seriously addicted, 23% of heroine users, 17% of cocaine users, and 15% of alcohol users. The potential medicinal properties of marijuana have been the subject of substantive research and heated debate. Scientists have confirmed that the cannabis plant contains active ingredients with therapeutic potential for relieving pain, controlling nausea, stimulating appetite, and decreasing ocular pressure. Cannabinoid-based medications include synthetic compounds, such as dronabinol and nabilone, which have been approved by the Food and Drug Adminitration (FDA). Scientists are continuing to investigate the medicinal properties of THC and other cannabinoids to better evaluate and harness their ability to help patients suffering from a broad range of conditions, while avoiding the adverse effects of smoked marijuana. Research on the long-term effects of marijuana use on the brain has yielded inconsistent results. Although it is somewhat necessary when calculating economic effects, the main objective of this paper is not to discuss the different arguments associated with the debatable aspects of health effects from marijuana use. A basic knowledge has been provided which will allow the remainder of this paper to focus on economic effects. ELACTISITY AND ESTIMATED DEMAND In order to begin to comprehend the widespread impact, prevalence, and price of marijuana if decriminalized, we must first estimate how demand would be effected. If the ban on Marijuana were to be lifted, there would undoubtedly be a short-term increase in demand for the drug. Illegality is currently a major deterrent for use of the drug as penalties for possession of marijuana can be very severe. Access to the drug is also limited, although the drug tends to be readily available in many areas. The elimination of a risk of penalization and increased availability would combine with social excitement to create a rise in the short-term demand of the drug. The long-term demand is much more difficult to predict. First, it is important to realize that marijuana, despite its criminalization, is widely used by a large portion of the American population. In 2003 the Library of Congress released a report that presented data, which reported; “that 96.9% of state and local law enforcement agencies nationwide describe the availability of marijuana as high or medium, only 1.8% describe it as low.” Overall, in an average year between 1991 and 2005, 58.44% of the public referred to marijuana as readily available (Fuju 2007). A recent national survey conducted by the federal government reported that 25.8 million people, or nearly one out of ten residents, use marijuana at least once a year. Over 6% of the population reported to use the drug on a monthly basis, while 47% of adults claim to have tried marijuana at some point in their lives (Bates, 2004). According to a survey by the National Survey on Drug Use and Health, an average of 20.5 million people have used marijuana per year from 1990 to 2005. This amount peaked in 2002 at 25.9 million and hit its lowest level in 1992 at 17.4 million. Marijuana use is likely underreported. A recent study issued by the Substance Abuse and Mental Health Services Administration (SAMHSA) provides additional data on this trend. Comparing self-reporting of marijuana use within the past month with urine testing of the same subjects indicated that 40% of the individuals who tested positive for marijuana use had declined to accurately report their marijuana use prior to urine testing (Harrison, 2007). If, as suggested by ONDCP and SAMSHA, illicit drug use is under-reported, then it is reasonable to inflate reports of marijuana use by two6 thirds (reflecting the 40% under-reporting of use in the SAMSHA report). This leads to the conclusion that the number of annual marijuana users in the United States is closer to 41 million annually than 25 million. Unlike alcohol and tobacco, marijuana users are disproportionately younger males, suggesting that the use of the drug reflects a youthful experimentation pattern rather than a long-term life pattern of consistent use (Harrison 2007). This illustrates that marijuana is a low risk for physical addiction with most users weaning themselves off the drug. It is unlikely that making it more available would have a significant increase on these well-established use patterns. The claim that decriminalizing Marijuana would lead to increased use assumes that prohibition is somewhat effective, in that it deters some from using the somewhat readily available drug. (Claiming prohibition to be effective is different than claiming it to be successful, which would necessitate an analysis of whether the benefits outweigh the costs. It is not merely enough that consumption decreases, but that the decrease is significant enough to warrant the hefty expenditures.) There are two main ways in which criminalizing marijuana could decrease consumption. The first being that its illegality increases price and consequently reduces demand. The second way in which prohibition can decrease consumption is by fear of penalty for the consumer. Regardless of which of these theories is the driving force, determining how effective prohibition is on reducing consumption will provide a good idea of how use will adjust if marijuana is decriminalized. Several studies have been conducted in an attempt to analyze the effectiveness of both prohibition-caused reasons for refraining from marijuana use. First, we will take a look at studies analyzing the elasticity of marijuana demand. According to Pacula (2001), marijuana use was found to be extremely inelastic. The elasticity of demand with respect to price was -0.06. Therefore, a 1% increase in price results in only a 0.06% decline in demand. In other words, if price increased by 16.67%, demand would respond with a 1% decrease. DeSimone and Farrelly (2003) found similar results, concluding that, “adult marijuana demand was not related to its own price”. They also found price to be irrelevant for the more common users, juveniles. However, regardless of age, many theorize that use will decrease with increases in arrest probability. Over the sample period of DeSimone and Farrelly’s study, the arrest rate per marijuana user doubled. According to their model estimates, if no other independent variables changed, demand should have decreased by 3%. Reality was quite the contrary. According to the data, use increased with juveniles displaying the greatest increase of 13.5%. From this, DeSimone and Farrelly concluded that “Clearly, factors other than prices or arrests are important in determining changes in drug use across cohorts.” (DeSimone and Farrelly 2003). Harvard professor Jeffrey A. Miron claimed in his report “The Budgetary Implications of Marijuana Prohibition” that the quantity demand for marijuana after legalization would largely be determined by price. Therefore: “if the price decline under legalization is minimal, then expenditure will not change regardless of the demand elasticity. If the price decline is noticeable but the demand elasticity is greater than or equal to 1.0 in absolute value, then expenditure will remain constant or increase. If the price decline is noticeable and the demand elasticity is less than one, then expenditure will decline. Since the decline in price is unlikely to exceed 50% and the demand elasticity is likely at least -0.5, the plausible decline in expenditure is approximately 25%. Given the estimate of $10.5 billion in expenditure on marijuana under current prohibition, this implies expenditure under legalization of about $7.9 billion.” Saffer and Chaloupka (2009) quantified the change in consumption from legalization, finding that “Marijuana decriminalization was found to increase the probability of marijuana participation by about 8%”. They proceeded to support their findings with the support of their peers; “The few prior studies of the effect of decriminalization on marijuana use generally find that marijuana decriminalization has no effect on participation. Pacula (2004), Thies and Register (2003), Dinardo and Lemieux (1992), and Johnston, O’Malley, and Bachman (1991) all used samples of young people and found no effect of marijuana decriminalization.” They did however reference one study by Model, which concluded that decriminalization increases marijuana use. The National Academy of Sciences (1999) undertook a study of many aspects of the marijuana question, including the effects of legalization. The Academy analyzed numerous studies and concluded that, “there is little evidence that decriminalization of marijuana use necessarily leads to a substantial increase in marijuana.” The US Drug Enforcement Administration (DEA) disagrees with the aforementioned studies by claiming that the use of marijuana would greatly increase if decriminalized. To support this claim they reference the history of the state of Alaska. In 1975, the Alaskan Supreme Court ruled to decriminalize personal consumption and possession of marijuana. The ruling allowed adults over the age of 18 to possess up to four ounces of marijuana in their homes and up to one ounce of marijuana in public. The ruling also allowed for citizens to have up to 25 marijuana plants in the home. The DEA reported that this resulted in increased usage rates especially among teens, many of which were still banned from using the drug. The DEA failed to explain that this is in accordance with a national trend. From 1974-1979, teen marijuana use skyrocketed nationwide from 27.1% to 36.5%. Increased teen use of marijuana in Alaska during this period is better explained by this national trend than the state decriminalizing the drug. According to a study done by the University of Alaska, in 1988, teen marijuana use in the state was double that of the national average. However, the University of Alaska researchers who conducted this study stated that his study should not be used to argue for or against legalization “because there are so many variables”. Northern aboriginal communities have always had higher rates of alcohol and drug abuse than the national average and during the years of Alaskan decriminalization, alcohol consumption went down. The 1975 Alaskan Supreme Court ruling became increasingly unpopular. On November 6th of 1990 the Alaska Marijuana Criminalization Initiative passed with 54.3% of the popular vote, making all marijuana possession in Alaska illegal. Recriminalizing marijuana failed to have any effect on usage. In 2003, an Alaskan appeals court again deemed four ounces of marijuana legal. In 2006 the Alaskan state legislature passed a new bill reducing the legal amount to one ounce. This provides us with a great variation of criminalization and decriminalization. In 1995, when all amounts of marijuana was illegal, 48.4% of Alaskan students had tried marijuana at least once. In 2003 when four ounces was again legal, usage dropped to 47.5%. By 2006 when one ounce was legal, usage dropped to 44.7%. Alaska has had high marijuana use rates both before and after the Alaskan Supreme Court ruling. From the Alaskan case we can conclude, in accordance with studies conducted by Pacula, Thies and Register, Dinardo and Lemieux, and Johnston, O’Malley, and Bachman that if legalized, long-term marijuana use would remain unchanged or slightly increased. DETERMINING PRICE AND TAXATION Marijuana legalization offers an important advantage over prohibition in that it allows for taxation on legal distribution of marijuana. Without taxation, the free market price of cannabis is estimated to be extremely low. Therefore, taxation could be implemented at extremely high rates, while maintaining the price of the drug at a rate competitive to other intoxicants, such as alcohol. Taxation on legalized marijuana would both create government revenue as well as provide a less harmful and addictive substitute to tobacco and alcohol. When analyzing the prospective supply of cannabis, we can reasonably assume that it would retail at the price similar to other medicinal herbs since the cost of production would be similar. According to the GNC website, ginseng sells for $1.50, damiana sells for $2.30, and mullein leaf for $1.85 per ounce. Typically, medicinal herbs sell for around $1.25-$2.50 per ounce. Higher quality forms of marijuana can be compared to fine teas, which typically cost up to $3 per ounce. After adjusting for inflation, this appears to be similar to standard pricing from before cannabis was prohibited. Advertisements from medical catalogs of 1929 and 1930 show that marijuana sold for $2.50-$5 per pound, or $0.15-$0.31 per ounce. This figure becomes $1.20-$2.40 per ounce after adjusting for inflation, which is very similar to the current price of many medicinal herbs. This is drastically lower than today’s rates of around $200-$300 per ounce of low-quality cannabis. It is important to note that different types of cannabis maintain different qualities and have different natural prices. Based on the price of marijuana when legalized and the current price of similar medicinal herbs, we can conclude that the natural price of marijuana if legalized would be about $1.80 per ounce. To better comprehend taxation rates, it is useful to convert these prices from perounce to “per-joint”, meaning standard dosage or serving. The number of joints in one ounce varies based on tetrahydrocannabinol (THC), which is the principal psychoactive constituent of cannabis, potency in the marijuana. THC potencies range from 2-15% based on the quality of the marijuana. The government has a standard dose or joint, which is used when the National Institute of Drug Abuse issues marijuana to researchers. These joints consist of medium-quality 6% potency leaf rolled into cigarette-sized joints of 0.4 grams, yielding a 25-milligram dose of THC. Therefore, as previously discussed, one ounce of medium-quality marijuana would cost about $1.80 and produce approximately 30 joints. With the absence of taxation, the estimated free-market price of marijuana would be $0.06 per joint, an incredibly cheap price compared to today’s cost of about $7.00 per joint. According to this model, decriminalization of marijuana would cut the free market price by a factor of over 100. Marijuana would be a much cheaper alternative to other intoxicants that are more harmful and addictive such as alcohol. It would be both beneficial and necessary to heavily tax cannabis. There are several ways which we can calculate the competitive rate or market price of marijuana. One method is to compare it to tobacco cigarettes, which would probably sustain similar manufacturing costs or marginal costs. The national average for a pack of cigarettes has rapidly increased in recent years from $3.00 in 2001 to $5.29 in 2011. Taxes vary widely by state with the highest state tax being New York at $4.35 and the lowest being Missouri at $0.17. The average state tax is $1.59 per pack with a national tax of $1.01 and additional varying local taxes. Since the average total cost of cigarettes is $5.29 and the average state and national tax on cigarettes is $2.60, the marginal cost of a pack of cigarettes is approximately $2.69. Assuming local taxes average at least $0.09, cigarettes are taxed at an approximate rate of 100%. With a marginal cost of $2.60 and twenty cigarettes in each pack, a single cigarette costs about $0.13, seven cents higher than my estimate of the natural price of marijuana. Although these prices are extremely similar, the difference can likely be explained by the difficulties associated with growing tobacco that do not exist with cannabis cultivation. Doctor Thomas Glynn, head of the international cancer control section at the American Cancer Society, commented on this, “There are about 10 million acres worldwide devoted to tobacco growth. And tobacco, as any agronomist knows, really depletes the soil. It takes a lot of manpower to grow and process it”. Comparing the costs of tobacco with the cost of marijuana is useful when analyzing the natural price but not necessarily the market price. The two drugs have very different effects of the user, mainly intoxication. One joint of marijuana is extremely more intoxicating than one tobacco cigarette. Therefore, comparing production to marijuana is a good determinant of what the free-market price would be, not the competitive rate at which it should be sold. In terms of intoxication, it is very difficult to evaluate an exact comparison between marijuana and the major legal intoxicant, alcohol, since the duration and effects vary with different people. Alcohol is clearly the most similar legal intoxicating drug. Despite the existing differences, attempting to compare the two drugs is the most effective method to calculate the competitive price for marijuana. A standard intoxicating dose of alcohol is about two to four drinks or three 12-ounce beers. The intoxication effect of this amount of alcohol is comparable to the intoxication effects of one joint although different people will respond in different ways to the two drugs. One dose of alcohol costs roughly $1.50-$2.50. Therefore, the market price of an intoxicating dose of marijuana is around $2.00. Since we previously determined that marijuana has a natural price of $0.06, there is room for heavy taxation to reach the market price of $2.00. This per joint price is also the approximate price at which marijuana is currently sold in the Netherlands. Cannabis in the Netherlands is currently decriminalized, but not legalized. This means that the Dutch tolerate possession and sale of up to 30 grams of marijuana in coffeehouses, while distribution, large-scale trafficking, and manufacture is illegal and punished. The price of marijuana in the Netherlands is very similar to prices for alcohol. Coffeehouses sell “hashish”, low-quality marijuana, for about $2.15 per gram while “sinsemilla”, high-quality marijuana, sells around $8.10. Assuming a gram of hashish can yield two joints, and a gram of sinsemilla can yield four joints, this works out to be around $1.00 to $2.00 depending on the quality. These prices are not affected by taxes since Netherlands does not directly tax marijuana sales (although indirectly through a sales tax on coffee shops). Since the Dutch have not experienced a widespread marijuana abuse issue, we can assume that this price level is realistic. This is much cheaper than my calculated free-market rate of $0.06 per joint. However, this is due to the fact that Dutch prices are inflated by the fact that cannabis remains decriminalized but illegal. While Dutch authorities tolerate small-scale domestic producers, international traffickers and large-scale domestic distributors are both subject to busts and punishments by Dutch authorities. The majority of the profits from marijuana sales in the Netherlands go to illicit traffickers. As a result, Dutch consumers pay inflated black market prices for marijuana and the Dutch government misses out on potential revenue generated from taxation on marijuana. Legalizing instead of decriminalizing marijuana is the more effective method to create government revenue by taxation. There are several different ways to implement a tax on marijuana. In order to gain the greatest national benefit and government revenue, we need to determine which taxation method would be most effective. One method would be to tax cultivators. This would be a very difficult task since small-scale home cultivators can easily grow cannabis. Effective enforcement would be nearly impossible. Another idea is to regulate consumers directly by requiring licensing for all who intend to buy, consume, or grow marijuana. By charging fees for these licenses, government could generate revenue. These user fees can be costly to administer since they must be distributed to a very wide population. This would also still require difficult enforcement efforts to the unlicensed as sharing from those with licenses would be very easy. The ideal tax would be conveniently assessed on licensed manufacturers and wholesalers, similar to the federal tax on cigarettes. This kind of tax would be easily enforced since there are a relatively small number of distributors. These distributors would add the tax, as well as a markup, to increase price to the competitive rate. A specific marijuana tax could be effectively implemented with a rate as high as $1.80 per dose. This would drive the price of a marijuana dose to $1.86, which would allow room for mark-up and overhead costs while still being made available at a competitive rate. This is a very high tax that, while still lower than the tax on tobacco, would generate a staggering amount of government revenue. One potential problem would be policy towards the previously discussed homegrowers. Enforcement efforts would be similar to those under prohibition: expensive and highly ineffective. Licensing and home-taxes would also be very difficult to implement effectively. The most practical solution would be to allow home growers to cultivate their own marijuana, free of tax or other regulation just like they would grow tomatoes, cucumbers, or beans. This is the method most closely associated with providing citizens with freedom and liberty. Clearly, the sale of untaxed home marijuana would be banned. Still, home growers would be able to produce marijuana at a much cheaper cost than is available via retail due to taxes, overhead, and markup costs. However, evidence shows that home growers would not be prevalent to the extent that a marijuana tax would be ineffective. During the initial decriminalization period (1975-1990) in Alaska, home cultivation was the one legal way to get marijuana. Marijuana was still illicitly sold however, around $250 per ounce, which is near the national competitive rate of today’s illicit marijuana. Alaskan marijuana users would rather illegally buy the drug at high prices, than grow their own for a fraction of the cost. This provides convincing evidence to believe that Americans today would act in a similar matter; buy expensive marijuana rather than grow their own. There would be a limit of how highly the government could tax marijuana before consumers opt to avoid high prices and cultivate at home. However, as was the case in Alaska, this limit would be significantly higher than the competitive rate. SOCIAL COST The social cost of legalizing marijuana will largely be determined by whether or not consumption experiences an increase after the drug has been legalized. As previously discussed, most research suggests that such an increase would be minimal or nonexistent. If that theory remains true, the social cost of legalizing marijuana would not be drastic since consumption remains relatively constant. One problem with analyzing the social cost of marijuana legalization is that the affect of marijuana on consumers is still an area of debate among researchers. As this thesis focuses mainly on the economic impact of legalizing marijuana, I will not spend too much time discussing the physiological and mental effects associated with the drug. Overall, the general consensus is that marijuana has a deleterious effect on consumers and society, although much less so than alcohol or tobacco. The California Research Advisory Panel agreed with this assessment, “An objective consideration of marijuana shows that it is responsible for less damage to society and the individual than are alcohol and cigarettes.” To effectively categorize types of social costs, I will break them down into two categories by the viewpoint of the consumer. First: internal costs and second: external costs. Internal costs are issues that have a direct effect on the consumer. External costs affect a third non-consuming party, or society as a whole. Examples of external costs would include increased insurance costs, accidents affecting third parties, and drug related violence and crime. Internal costs include health problems, reduced personal income, and poor achievement. As will be discussed, there often is a thin line between external and internal costs since many effects are both internal and external. An example of this is lack of motivation and poor school performance caused by marijuana. This is an area of concern since the majority of marijuana users are high school and college age males. According to a study by the National Organization for the Reform of Marijuana Laws, one out of four marijuana possession arrests involves people under the age of 18, and nearly three-quarters of all pot arrests are for people under the age of 30. Lack of motivation and poor school performance is an internal effect given that the laziness effect would directly affect the school performance and employment of the marijuana user. However, school performance and employment are both societal issues, therefore making it also an external effect. If legalized, age and driving restrictions on marijuana use would be necessary. The first main internal cost from a physiological standpoint would be respiratory harm due to smoking. A recent epidemiological study by the Kaiser Permanente Center for Health Research found that daily marijuana smokers had a 19% higher rate of respiratory complaints than those who do not smoke the drug. While these reparatory problems have the potential to raise group insurance rates, this would still be mainly an internal cost. Legalizing cannabis would reduce the cost of respiratory damage from marijuana consumption by allowing for and encouraging the research and development of better filtration technology as well as increasing awareness of marijuana related respiratory damage. Increased education of risks would lead to higher use of alternative consumption methods, and the development of more potent but less harmful varieties of marijuana. Marijuana can also be consumed in ways other than smoking, such as through baked goods. These alternative forms of consumption eliminate respiratory problems associated with marijuana use. Another claimed internal cost is the controversial accusation of marijuana being a “gateway drug” in that it is prone to direct users to consume more dangerous and addictive drugs. This theory has shaped prevention efforts and government policy for decades. A 12-year study by the University of Pittsburg provides evidence contrary to the gateway theory. This study tracked 214 boys beginning at ages 10-12 who all eventually used some form of drugs, whether legal or illegal. When the boys reached age 22, they were classified into one of three groups: those who only used legal drugs (alcohol and tobacco), those who started with alcohol and tobacco then moved on to marijuana (gateway theory), and those who used marijuana prior to alcohol or tobacco (reverse sequence). Nearly a quarter of the study population, 28 boys, exhibited the reverse sequence of using marijuana prior to alcohol or tobacco. Those 28 boys were no more likely to develop a substance use disorder than those who followed the traditional succession the gateway drug theory. “The gateway progression may be the most common pattern, but it’s certainly not the only order of drug use,” said Ralph E. Tarter, Ph.D., professor of pharmaceutical sciences at the University of Pittsburgh and lead author of the study. “In fact, the reverse pattern is just as accurate for predicting who might be at risk for developing a drug dependence disorder.” The study found that whether a teen follows the gateway theory or the reverse gateway scenario is not determined by the characteristics of the drug, but rather by environmental aspects. For example, if it is easier for a teen to obtain marijuana than beer, he is more likely to consume marijuana. The study also found several factors other than use of a transitional drug that leads to the consumption of more dangerous and addictive drugs. These factors include: poor physical neighborhood environment, exposure to heavy drugs, lack of parental involvement and interaction, and a general inclination for deviance from sanctioned behaviors. “The emphasis on the drugs themselves, rather than other, more important factors that shape a person’s behavior, has been detrimental to drug policy and prevention programs.” Dr. Tarter said. “To become more effective in our efforts to fight drug abuse, we should devote more attention to interventions that address these issues, particularly to parenting skills that shape the child’s behavior as well as peer and neighborhood environments.” Eliminating marijuana to prevent its supposed role as a gateway drug is not an effective or efficient way to prevent the use of highly addictive and dangerous drugs. A 2007 report by ABC News on marijuana cultivation features comments on whether marijuana is a gateway drug by Columbia University neuroscientist Dr. Carl Hart: Is marijuana a gateway drug? It’s a difficult question because I think people focus on, ‘you try marijuana you’re going to go on to other drugs,’ when the vast majority of the folks who [use] marijuana do not go on to other drugs. But certainly, those individuals who’ve tried cocaine and they have tried heroin, most of them have used marijuana. And most of them have used alcohol underage, and most of them have smoked tobacco as well. So if you think about ‘gateway’ in that sense, certainly you can say it’s a gateway. But what is the meaning of gateway when you put it together like that? There are also social benefits associated with legalizing marijuana. Removal of marijuana from the black market is a major social benefit. A report by the National Survey of Drug Use and Health found that the nation’s black market in drugs supports more than 4.6 million drug sellers. As report author Gettman noted, while the NSDUH data does not disaggregate the data based on the type of drug sold, marijuana is by far the most commonly sold drug in America. The NSDUH undercounts actual drug use and sales so the figure of 4.6 million marijuana sellers is likely accurate. Of those, 23% or about one million, were under the age of 18. The study found most of the teen sales are small-time, occasional sellers but 27% sold pot more than 10 times in a year. Even if the sales are small-time and occasional, the consequence can be a serious felony marijuana distribution bust. The vast majority of these teen sellers go unpunished. However, illegally distributing marijuana can have negative psychological effects. The seller will become a self-labeled criminal and deviant which, can destroy resolve to be a contributing member to society. The main external cost associated with marijuana use is an increased risk of accident due to mental impairment. According to the Kaiser study referred to previously, this is the number one hazard of marijuana use as daily users reported a 30% higher rate of injuries than non-users. Since many of these accidents may likely involve a nonconsuming third party, this could also be counted as an external cost. It is extremely difficult to quantify internal costs. One of the main reasons for making a distinction between external and internal costs is to determine the cost that marijuana use has on society. Since internal costs primarily affect only the user, it can be assumed that the harm will be at their expense. External costs are very difficult to quantify but can be done when considering the external costs of alcohol and tobacco. Table 1 does this by calculating the cost that marijuana, alcohol, and tobacco have on society. The numbers represent the external cost per dose, which also represents the estimated harmfulness tax. A study by W. Manning, aimed at determining appropriate tax rates on alcohol and tobacco, was the source for the numbers in this table. Manning’s analysis displays how much of the health cost imposed on the insurance system by alcohol and tobacco related causes is counterbalanced by the fact that smokers and drinkers typically die younger, therefore reducing pension and retirement costs. After compensating for that fact, Manning calculates the health cost of cigarettes to be $.36 per pack for diseases and second hand smoke, which is just under two pennies per cigarette. Net Health Costs for marijuana are only relevant if the drug is smoked and thus creates second hand smoke. As previously discussed, there are less harmful ways of consuming the drug. Through incentivized taxation, other forms of consumption could become the main form of marijuana use, thus eliminating all disease costs of the drug. By estimating the equivalency of marijuana and tobacco we can quantify the societal cost of smoking marijuana. When the two drugs are compared, the average marijuana smoker inhales about four times as much noxious tars as cigarette smokers. The amount of second hand smoke created maintains the same ratio. However, the average joint weighs about as much as two cigarettes. Marijuana does not contain nicotine, the most addictive substance known to man and the leading factor in tobacco-related heart disease. Second hand smoke from tobacco is more harmful than second hand smoke created from marijuana. Therefore it seems reasonable to put the disease related external cost of marijuana at 2 cents per joint. In regards to alcohol, Manning concludes that the Net Health Costs of drinking one “excess ounce” is $.26. He defines an excess ounce to be “an ounce in excess of one per day”(Manning 2003). The major external cost of alcohol is accidents, costing $0.93 per excess ounce while one “average” ounce (not in excess) is $0.38. In his analysis, Manning includes traffic injuries caused by drunk drivers including non-drinking victims. Manning does not consider other alcohol related accidents or alcohol related violence. Overall the external cost of alcohol is $1.19 per excess ounce. The external cost of alcohol is clearly dominated by accidents. It is unclear how to relate these to marijuana. The majority of research conducted on the matter claims that marijuana is less of an accident liability than alcohol. Studies of fatal car accidents indicate that, at least on the road, marijuana tends to be a secondary risk factor compared to alcohol. Marijuana is much less of a risk for violent accidents since marijuana reduces violent tendencies, unlike alcohol, which amplifies them. In terms of intoxication, one joint is comparable to in-between one ounce and one excess ounce. We can estimate that the external cost of marijuana related accidents is $0.60, the cost in between an average ounce and an excess ounce of alcohol. Table 1 External Costs of Drug Use Cigarettes (pack of 20)* Alcohol (1 excess oz)* Marijuana (1 joint) Net Health Costs $0.15 smoking diseases $0.23 passive smoking $0.26 $0.02 smoking Accidents $0.93 $0.60 Total $0.38 $1.19 $0.62 *Source: Manning et al., "The Taxes of Sin: Do Smokers and Drinkers Pay Their Way?" JAMA 261:1604-9. Therefore, we can conclude that the total social cost of marijuana is $0.62 per joint. Manning would argue that the above formulas should decide the rate of an implemented “harmfulness tax”. However, as previously discussed, taxes should be large enough to increase the price of marijuana to the competitive rate. A tax fulfilling that objective would be over double the external social cost of marijuana use. It is useful to know the determined social cost of $.62 per joint of marijuana when analyzing whether or not legalization would benefit society as a whole. ENFORCEMENT COST According to the International Centre for Prison Studies at King’s College in London, the United States leads the world in incarceration of its citizens. This leadership is not by a small margin, and it is both in absolute terms as well as percentage of population. The U.S. surpasses the second place contender, the Russian Federation, by 20%. It leads European industrialized countries by approximately 500%. Extensive incarceration is a heavy burden on government budgets at the expense of taxpayers. Many factors affect incarcerations, but the war on drugs in America is a leading factor. Aggressive policing, combined with mandatory sentencing and the application of drug testing to parolees and probationers, has caused a substantial change in the composition of the American prison population. It is important to analyze the cost and benefits of maintaining such high incarceration rates to determine if this is an effective use of taxpayer money. For decades, violent criminals made up the majority of inmates. However, in the late 1970’s we experienced an influx of nonviolent incarcerations. Today, people incarcerated for nonviolent crimes maintain the majority. According to a report by the Center for Juvenile and Criminal Justice (1999): Contrary to the public perception that the incarceration of violent offenders has driven America’s prison growth, the Institute found that 77% of the growth in intake to America’s state and federal prisons between 1978 and 1996 was accounted for by nonviolent offenders. According to data collected by the United States Justice Department, from 1978 to 1996, the number of violent offenders entering our nation’s prisons doubled (from 43,733 to 98,672 inmates); the number of nonviolent offenders tripled (from 83,721 to 261,796 inmates) and the number of drug offenders increased seven-fold (from 14,241 to 114,071 inmates). Justice Department surveys show that 52.7% of state prison inmates, 73.7% of jail inmates, and 87.6% of federal inmates were imprisoned for offenses, which involved neither harm, nor the threat of harm, to a victim This shift that occurred during the 1970’s, has greatly increased the financial burden of incarceration. It began a trend that is still prevalent today. The number of people in state prisons for drug offenses has increased 550% over the last 20 years (Justice Policy Institute 2009). Incarceration is just a fraction of the cost of enforcing marijuana criminalization. Court and police costs also cost American taxpayers billions of dollars per year. These other costs have continued to rapidly increase similarly to the increase in incarceration. The budget for the federal Drug Enforcment Adminitration has increased 40-fold since its inception in 1973, from $65 million (and 2,800 employees) to $2.6 billion (11,000 employees) in 2009 (Nelson 2010). The common taxpayer has paid for this rapid increase in cost. A report by Jon Gettman in 2007 reported an estimate of the national criminal justice expenditures for enforcing marijuana to be $16.4 billion per year. He reached this number by using simple percentage based calculations. Gettman received numbers from estimations from an Office of National Drug Control Policy (ONDCP) report that found Criminal Justice Systems and other Public Costs to be about $36.4 billion, including $13.2 billion for state and local corrections facilities, $9.8 billion for law enforcement expenses, and $6.2 billion for federal supply reduction activities. Marijuana arrests accounted for 45% of all drug arrests annually. Consequently Gettman concluded that $16.4 billion in law enforcement costs were spent on marijuana related cases. According to Harvard professor Jeffrey Miron, the $16.4 billion dollar estimate by Gettman is fairly accurate, but slightly too high. In the 2010 edition of The Budgetary Implications of Drug Prohibition, Miron estimated that legalizing marijuana would save $13.7 billion per year in government expenditure on enforcement of prohibition (Miron 2010). “Legalization eliminates arrests for trafficking and possession,” Miron says. “Second, legalization saves judicial and incarceration expenses. Third, legalization allows taxation of drug production and sale.” In an interview with CNBC, Miron argued that increase in enforcement would not be beneficial. “I don’t think there is any data to suggest any payoff for greater enforcement. If you are making lots of arrests then you are spending more money-making arrests, lots of prosecutions, etc. In terms of showing that differences in enforcement lead to differences in use rates, no, there isn’t any evidence to support that.” A report by the Sentencing Project calculated the estimated national criminal justice expenditures for enforcing marijuana laws by using a proportionate cost mode. This report totaled all of the criminal justice costs and associated them proportionately with marijuana related events or persons to estimate the proportion of marijuana related expenditures and analyzed them by state. The report concluded that eight states spend more than $1 billion taxpayer’s dollars enforcing marijuana laws. New York spends around $3 billion, Texas $2 billion, California and Florida $1.9 billion; and Michigan, New Jersey, Ohio, Pennsylvania $1 billion. New York and Texas lead the nation in marijuana arrests with more than 57,000 in each state. However, both of these states are towards the lower end of per capita arrests. Conservative heartland states maintained the highest per capita arrest ratio with Nebraska having 458 arrests per 100,000 citizens, followed by Louisiana (398), Wyoming (386), Kentucky (364) and Illinois (359). The national average was 239 marijuana arrests per 100,000 citizens. North Dakota spends the least on marijuana enforcement, $45 million a year, reflecting both its location and population density. A report by the National Organization for the Reform of Marijuana Laws (NORML) found similar results. The report also concluded that the cost of marijuana enforcement in the United States is an average of $10,400 for each pot smoker arrested. American taxpayers cover this staggering cost. NORML also claims that marijuana arrests over the past two decades have failed to have any impact on marijuana use rates or other indicators chosen by drug enforcers to measure “success” in the war on drugs. The study also found arrests to be disproportionately heavy towards the young and non-white. NORML refers to current marijuana policies as “wholly ineffective at controlling the use and sale of marijuana” (NORML 2009). As marijuana arrest rates have increased, this increase has “not been associated with a reduction in marijuana use, reduced marijuana availability, a reduction in the number of new marijuana users, reduced treatment admissions, reduced emergency room mentions of marijuana, any reduction in marijuana potency, or any increases in the price of marijuana.” NORML also cited racial prejudice as another problem that continues to plague marijuana enforcement. Adult blacks constitute 11.9% of annual marijuana users. However, they account for 23% of all marijuana possession arrests in the U.S. NORML concluded that “marijuana users who are white, over 30 years old, and/or female are disproportionately unaffected by marijuana possession arrests.” As was previously discussed, marijuana is very easily attainable in America. Therefore, marijuana enforcement is not only enormously expensive but also highly ineffective in preventing the distribution of marijuana. Most research finds the cost of enforcing marijuana prohibition to be around $15 billion. In 2007, Jon Gettman estimated the cost to be $16.4 billion; while in 2010, Jeffrey Miron estimated the cost to be roughly $13.7. The average of their findings would be approximately $15.1 billion as the cost of enforcing marijuana prohibition, which will be the figure used in calculating the total economic effect of legalizing marijuana. CONCLUSION In order to calculate concluding figures, we must establish the estimated size of the marijuana market. We have already determined marijuana to be a readily available drug that nearly half of adults have tried at some point in their life. However, the amount that is actually consumed is very difficult to analyze due to differing reports caused by its illegal nature. The most recent State Department and NDIC reports provide an estimate that in 2006, at least 8,700 mt (metric tons) of marijuana was available for sale in the United States (NDIC, 2011). This is a number much lower than estimates by the Library of Congress and National Survey data. I previously established the average cost of an ounce of illegal marijuana in today’s market to average around $250. There are 35,274 ounces in a metric ton. By multiplying 8,700 with 35,274 we can conclude that there is roughly 306,883,800 ounces of marijuana consumed in the United States annually. If each ounce sells at an estimated $250 then the illegal market for marijuana use is approximately $76,720,950,000. This large sum of money would be added to American Gross Domestic Product; increasing investment and creating thousands of jobs. It should be noted that the estimated $77 billion market is at high prices caused by illegality of the drug. If legalized, the price of the market would drop. A market of nearly $77 billion is fairly similar to tobacco and alcohol markets today. According to Standard & Poor’s industry report, the tobacco and alcohol industries generated $263 billion combined in 2008. Alcohol represented $188 billion of the total, with $99 billion in beer, $61 billion in spirits, and $27 billion in wine. Tobacco generated $75 billion including $71 billion in cigarette sales (Nelson 2010). According to research by the Fuji publishing company, the market for tobacco directly creates 662,402 jobs with a total compensation of $15,161,772,035. If legalized, a cannabis industry that is currently nearly $77 billion would also create thousands of jobs. As marijuana is grown, packaged, and transported from the field to the consumer it would create jobs in growing, cutting, processing, distribution, and sales. These jobs would create legal, taxable employment as opposed to the criminal black market that it currently funds. Closely associated with the current marijuana black market is illegal immigration. According to the Federation for American Immigration Reform, there were 72,000 criminal aliens in federal custody at the end of 2007 solely because of drug charges. By making marijuana possession legal and increasing the legal manufacture of the drug in the United States, there would be less demand for the drug from Mexico and South America. With fewer drugs crossing the border, the number of immigrants who transport drugs in exchange for a cash infusion to help them with the crossing would drop in turn. A reduction in the number of illegal crossings would also result in the reduction of the need for taxpayer provided resources by immigration and border control agencies. If taxed at the proposed $1.80 per joint, government would see revenues of $54.00 per ounce. With an estimated market of 306,883,800 ounces, total government revenue from cannabis taxation would be $16,571,725,200. $16.5 billion is a staggering figure that would greatly help to reduce government deficit. In addition to the generated tax revenue, the government would also save an estimated $15.1 billion annually on marijuana enforcement costs. When potential tax revenue is added to funds that would be saved by reducing enforcement cost, the total increase in government budget from legalizing marijuana would be approximately $31,671,725,200. However, as was previously discussed, there is also a social cost associated with cannabis legalization. Marijuana has an estimated social cost of $.62 per joint. Therefore, the social cost of marijuana per ounce is $18.60. When this is multiplied by the 306,883,800 ounces of marijuana sold in America every year, we can assume that the national total social cost of marijuana is $5,708,038,680. When the social costs are subtracted from the total increase we reach the final total effect that legalizing marijuana would have on government budget to be $25,963,686,520. Marijuana legalization is not a magical solution to the current drug problems facing America today; nor is it the complete solution to the economic and budgetary problems that our nation faces. However, it could drastically reduce the annual deficit in government budget by nearly $26 billion. In a time of economic recession such legislation should be seriously considered. REFERENECES Bates, S. (2004). The Economic Implications of Marijuana Legalization in Alaska. Retrieved from http://www.prohibitioncosts.org/FinalBatesreport.pdf DeSimone J., Farrelly M. Price and Enforcement Effects on Cocaine and Marijuana Demand. Economic Inquiry January 2003: 98-115 Fuji Puplishing. (2007). fujipub.com. Retrieved from http://fujipub.com/fot/working.html Gahlinger, P. M. (2004). Illegal drugs, a complete guide to their history, chemistry, use and abuse. UnitedStates of America: Plume Books. Gettman, J. (2007, September 05). Drug science. Retrieved from http://www.drugscience.org/Archive/bcr4/Lost Taxes and Other Costs of Marijuana Laws.pdf Gettman, Jon. 2004. Crimes of Indiscretion: the Nature, Extent, and Costs of Marijuana Arrests in the United States. Washington, DC: National Organization for the Reform of Marijuana Laws. Gumbiner, J. (2010, December 05). Psychology today. Retrieved from http://www.psychologytoday.com/blog/the-teenage-mind/201012/is-marijuana-addictive Harrison, L. (2007) Comparing Drug-Testing and Self-Report of Drug Use Among Youths and Young Adults in the General Population. Washington, DC: SAMSHA IllegalImmigrationstatistics.org. (2011, December 12).Legalizing marijuana would reduces crime, increase tax revenue and ease illegal immigration concerns. Retrieved from King, Ryan and Marc Mauer. 2005. The War on Marijuana: The Transformation of the War on Drugs in the 1990s. Washington, DC: The Sentencing Project. Miron, J. A. (2010, February). Retrieved from http://www.economics.harvard.edu/faculty/miron/files/budget 2010 Final.pdf NDIC. (2011, 04). www.justice.gov/ndic/topics. Retrieved from http://www.justice.gov/ndic/pubs44/44731/44731p.pdf Nelson, A. (2010, April 20). Cnbc special report. Retrieved from http://www.cnbc.com/id/36179677/How_Big_Is_The_Marijuana_Marke Newport, F. (2011, October 17). Gallup.com. Retrieved from http://www.gallup.com/poll/150149/Record-High-Americans-Favor-Legalizing- Marijuana.aspx Pacula RL., Grossman M, Chaloupka FJ, O’Malley PM, Johnston LD, Farrelly MC. Marijuana and Youth. Risky Behavior among Youth: An Economic Analysis. Ed. J Gruber. Chicago, University of Chicago Press. 2001:271-326 Parke R, Clarke-Stewart A. From Prison to Home: The Effect of Incarceration and Reentry on Children, Families, and Communities. U.S. Dept of Health and Social Services; Dec. 2001. Reuteman, R.. The cost-and-benefit arguments around enforcement . CNBC, 2010. Web. 15 Apr 2012. <http://www.cnbc.com/id/36600923/The_Cost_and_Benefit_Arguments_Around_Enforc ement>.

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