The Economist: Economics and drugs

I attended a fascinating lecture this week by a Mexican economist on the drug war in his country. It got me to thinking about one more economic-politic issue to get off my chest before I go back to more interesting subjects like moral hazard and rent and unemployment. I know you can hardly wait.

You know that I’m a big believer in the workings of the free market as long as there are lots of buyers and lots of sellers. At first glance one would think that means a free drug market. There certainly are plenty of buyers and sellers. But I remember something Kenneth Boulding, a famous economist who ended his career at the University of Colorado, told me. “You can’t have a free market in addictive substances because, by definition, the buyer cannot control his demand.”

Now, I don’t know whether marijuana is addictive or not. Some claim it is; others say it isn’t. I was too old in the 1960s to be part of the drug culture, married with four little girls. My first and last experience with pot was at a football game at CU in the 1970s, when one of my economics students offered me a puff. My husband’s only experience was about the same time, at an end of the semester party for an evening class he taught in Boulder. He happily, albeit unknowingly, enjoyed a pot-laced brownie his students brought to the potluck.

But let’s assume marijuana isn’t addictive, more like alcohol than nicotine (a habit-forming substance, incidentally, that we allow to be freely bought and sold). The government has no business legislating morality – that’s a job for the churches and parents. So economic principle suggests pot should be grown, sold, taxed and consumed by those who choose to partake. Where necessary it should be regulated, just as other things we consume are regulated. If it affects one’s ability to operate a car or heavy equipment, then there need to be appropriate laws enforced by authorities. 

I know, I know. Blood tests won’t work because, unlike alcohol, it stays in your bloodstream long after it affects your ability to drive. At least, that is one of the claims, which certainly can be confirmed or rejected by scientists. I have confidence that we can come up with a test to determine whether the driver is impaired, along with proper enforcement and consequences for those who are convicted.

If there are social costs to marijuana consumption, the tax should be set high enough to cover those costs. That’s where we frequently make mistakes in our tax policy. The tax on gasoline doesn’t come close to covering the environmental, health and social costs of automobiles. We don’t tax downtown parking at a rate that would encourage people to bicycle or take public transportation, thus reducing congestion and pollution. Health insurance isn’t priced based on the costs of poor lifestyle, although we are taking a few baby steps in that direction.

But, with marijuana, we are starting with a clean slate, since up until now it hasn’t been legal to buy and sell in this country. We have a chance to get it right. 

One comment made following the drug war lecture was that once pot is legal, the price will go down. My immediate reaction was that would be a serious mistake. Certainly, all other things being equal (an assumption economists love to make), legalization should lead to an increase in supply and a decrease in price. If pot is harmless, that is fine. But if it has social ramifications, it is important to keep the price high enough to cover those potential costs and consequences.

Somewhere in a drawer at home, there is a picture of me in a marijuana field in Bhutan, surrounded by acres of plants that tower over me. There, it is called pig food because that was the only purpose pot served until television introduced the Bhutanese to its other joys. It’s no wonder their king tried to keep the country closed to the outside world.