Putting a Value on Cannabis

Economics of Cannabis Legalization (1994) Detailed Analysis of the Benefits of Ending Cannabis Prohibition

June 1994
by Dale Gieringer, Ph.D.
Coordinator, California NORML

The Case For Legalization
The Cheapest Intoxicant
Putting A Value On Cannabis
Computing A Harmfulness Tax
Revenues From Legalization

Putting a Value on Cannabis
   One way to estimate a reasonable price for marijuana is to evaluate it in comparison to the major competing intoxicant, alcohol. While it is impossible to make an exact comparison between pot and booze, since their duration and effects are different and dosages vary from person to person, a joint might be roughly equated to an intoxicating dose of alcohol—between one and two ounces, or two to four drinks. Thus one joint might be worth two to four 12-oz. beers or 1/3 - 2/3 bottle of wine. These are currently sold on grocery shelves at a minimum price of around $1.25 - $2.50. It may therefore be concluded that a reasonable minimum price for marijuana should be around $1.25 - $2.50 a joint, with higher prices for premium grades. This works out to $75 - $150 per ounce for standard 6%-potency marijuana.
    Coincidentally, this price range is in line with that presently seen in the Netherlands, where coffeehouses sell hashish and sinsemilla by the gram for 4 to 15 guilders, or $2.15 - $8.10.4 Taking the cheaper grade to yield two joints per gram and the premium grade four, this works out to $1 to $2 per joint. The fact that the Dutch have not been plagued by widespread cannabis abuse and indeed believe they have obtained public health benefits from their system provides reassurance that this price level is realistic.5
    It should be noted that Dutch prices are inflated by the fact that cannabis remains illegal, not by any form of legal taxation (though the state does tax cannabis indirectly through the sales tax on cafes). Although Dutch authorities tolerate a number of small-scale domestic producers, international traffickers and domestic distributors are both subject to busts at the whim of the police. As a result, Dutch consumers pay inflated black market prices. This is not necessarily the optimal model for marijuana price control, since the lion’s share of the profits go to illicit traffickers.
    In a legalized market, the easiest way to maintain marijuana prices would appear to be through some form of excise tax, as presently imposed on alcohol and tobacco. This could conveniently be assessed on licensed manufacturers or wholesalers, like the federal tax on cigarettes. Aside from a strict prohibition against sales to unlicensed distributors, cultivators need not be directly regulated. Excise taxes have the advantage of being easy to enforce, since they involve a relatively small number of distributors. The latter in turn pass the tax along with a markup, magnifying the price increase throughout the distribution chain.
    Another way to control the market would be to tax or regulate cultivation. However, experience shows that it is no easy task to track down and regulate marijuana growers. More so than alcohol or tobacco, marijuana lends itself easily to small-scale home cultivation and production. The problem therefore arises as to how to treat home cultivation in the legal market. Clearly, the sale of untaxed home marijuana must be banned. In theory, home cultivation could also be taxed and licensed in order to maintain high prices. However, it seems unlikely that such requirements could be enforced in a world of legalized marijuana. The policing of home growers would appear to require many of the most odious and objectionable techniques of current marijuana enforcement, such as helicopter surveillance, snooping on homes and spying on garden stores.
    The most practical policy is thus likely to be the one most consistent with principles of personal freedom and civil liberties, namely to let Americans grow their own cannabis at home, just as they might grow tomatoes, apples or grapes. The inducements to home cultivation should not be exaggerated: in Alaska, where it was the one legal way to get marijuana before 1991, pot continued to be sold illicitly at prices around $250 an ounce, proof that many pot smokers are quite disinclined to grow on their own. Nonetheless, home cultivation would effectively put a lid on the amount marijuana that could be taxed, since consumers would be induced to grow their own if prices rose too high.
    Another possible way to limit marijuana abuse would be to regulate consumers directly, for instance, by requiring "user’s licenses" for the right to buy or use marijuana, as proposed by Kleiman.6 By charging fees for these licenses, the state could raise tax revenues. User fees are apt to be more costly to administer than excise taxes, since they must be collected from a much wider population. More importantly, they are also apt to be unenforceable, given the ease with which unlicensed users can grow their own at home. One situation in which user fees might be attractive would be under a regime of decriminalization, where commercial sales were illegal. Consumers might then be allowed to purchase a license to consume and grow marijuana for personal use. In this system, licenses would afford the one opportunity for the government to derive tax revenues from marijuana, while an active marijuana surveillance program would still be needed to prevent commercial sales and unlicensed use.
    The problem of cannabis enforcement was first rigorously addressed one hundred years ago by the British Indian Hemp Drugs Commission.7 The commission concluded that cannabis prohibition was not practicable, and that the best solution was to tax it to the extent possible. After examining the different regulatory systems in various provinces of India, the Commission especially recommended the system in Bengal, where cannabis was taxed more rigorously than in other provinces by means of a system of excise fees and vendors' licenses. Noting that hemp drugs tended to be much cheaper than liquor, the Commission argued that cannabis was undertaxed.8 It also noted that there were regions where cannabis grew wild, in which it was virtually impossible to control traffic in bhang, a low-potency beverage made from leaves. Cannabis remained legal in India until 1989, when it was banned under terms of the international Single Convention Treaty on Narcotics.