Starting with Uruguay in 2013, many countries around the world are starting to decriminalize and even legalize marijuana for both recreational and medical use. For a substance that was once regarded by former US President Ronald Reagan as ‘probably the most dangerous drug in the United States today’, this recent trend may seem puzzling. However, an economic analysis may help explain the incentives behind different government policies towards marijuana. By understanding how different regulatory approaches minimize social externalities or generate market failures, this analysis can aid policy decision-making and evaluations.

From an economics point of view, the criminalization of marijuana can be justified as a remedy for the negative externalities of drug use. Despite the possible private benefits that marijuana may bring to an individual, the social cost of drug consumption outweighs the aggregate private benefits. Public health studies have shown that drug use decreases productivity and increases the strain of healthcare systems, as marijuana is an addictive substance that may cause lasting health consequences. Furthermore, marijuana use impairs cognitive abilities and can contribute to negative social externalities through traffic accidents or other impulsive decisions. Therefore, an outright ban on marijuana can minimize these negative social externalities.

Yet, by placing a complete ban on marijuana, the government may have created a complete market failure, with a significant level of deadweight welfare loss. Additionally, the cost of regulation must be considered in relation to the social cost of drug use. In the United States, for example, Jeffrey A. Miron, a Harvard Economics professor, estimates that the decriminalization of marijuana will bring expenditure savings of more than $13.7 billion. Professor Miron’s methodology of estimating the expenditure savings from drug decriminalization separates the cost of regulation into three categories: police expenditures, judicial and legal services expenditures, and corrections expenditures. The criminalization of marijuana encourages the growth of an underground market for the banned good. Not only does a shadow market drive criminality and violence, both of which are losses in social welfare, the government must also dedicate substantial resources to carrying out its policy. Furthermore, the social cost of criminalisation extends beyond increased government budgets and can include significant human costs, as a conviction for drug-related offences and imprisonment can drastically and negatively alter one’s life. Moreover, in some countries, such as the United States of America, drug regulation has also been a main cause of police violence and many social issues. The burden of drug regulation enforcements is often distributed unevenly within society, and enforcement agencies tend to target ethnic minorities and the poorer sections of society. In Singapore, Malays make up 13% of the entire population but 84% of executions for drug trafficking. On the other hand, in the United States of America, where marijuana use is roughly equal between Black and White Americans, Black Americans are 3.73 times more likely to be arrested.

Apart from the social cost of criminalization, we may also have to consider the opportunity for government tax revenue from drug sales. If the sale of marijuana is legalised, the government can bring the market for marijuana into the open, where it can be regulated and taxed. The creation of a proper and transparent market will allow the government to reap income from drug sales, and the tax revenue could also be placed back into educating the youth on drug abuse and how to use marijuana safely. Using the United States of America as an example, it has been estimated that the additional tax revenue from legalised marijuana sales and consumption may reach approximately $6.4 billion. Notably, however, these statistics may not be applicable to other countries around the world, as the US has the highest level of drug use in the world. Moreover, in the UK, the legalization of drugs without proper education on how to use drugs safely means that there may be higher risks of overdose, creating a greater strain on the NHS.

An economic analysis of drug regulations can reveal the budgetary reasons for criminalising, decriminalising, or legalising marijuana and other drugs. These economic calculations measure the social costs of drug abuse, as well as the costs of drug regulation enforcement and revenue from a legalised drug market. At the same time, the market calculations behind drug regulations also implicate important decisions in the political and moral economy. Drugs possess a unique position in our society, and anti-drug campaigns, such as Reagan’s Drug on War, similarly take on greater social significance. Furthermore, the definition of a dangerous drug—why marijuana classified as dangerous while caffeine and tobacco are legalised—is inseparable from social agreements about health and the role of governments in promoting health, both of which complicate any simple economic calculations around drug policies.