Costs of legalizing marijuana

California may become the first state to legalize, tax and regulate marijuana, as the NY Times reported on Oct. 27, in anticipation of a hearing by the California State Assembly the next day. In an article yesterday on the hearing held before the Committee on Public Safety, The Sacramento Bee stated, "Testimony revealed layers of complexity."

Among the testfiers was Rosalie Liccardo Pacula of the RAND Corporation. She discussed four areas affecting either potential revenue or cost:

1. Legalizing marijuana would drop its price considerably, more than the 50% in current revenue estimates.
2. The proposal to tax marijuana at $50/ounce is not realistic; to deter the black market requires the state to let the price of marijuana fall to an amount close to production that will mean a smaller tax revenue.
3. Current estimates of price are not useful for predicting a change in consumption because demand elasticities apply to small changes in price and there would be a large price drop with legalization.
4. "The Board of Equalization’s estimate of $1.4 billion potential revenue for the state is based on a series of assumptions that are in some instances subject to tremendous uncertainty and in other cases not validated."

Legalizing Marijuana: Issues to Consider Before Reforming California State Law (pdf, 8pp/170kB)