All Financial Wisdom
Economic Advantages of Legalizing Drugs
Different states have already legalized marijuana for recreational uses – Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington – and currently the state of Vermont is on the way.
All this refers to the legalization of a drug that is considered soft, but what if we extended legalization to other drugs? According to the World Health Organization, the percentage of all deaths worldwide linked to tobacco and alcohol is 8.8% and 3.2% respectively, in contrast, deaths from illicit drugs is a 0.4%.
There is a manifest inconsistency, allowing the public consumption of substances that generate more deaths a year compared to other substances that generate a lower number of deaths per year. In the following lines we are going to analyze what the economic advantages of fully legalizing drugs would be.
Illegalization: A blank check for mafias
There is no one more interested than the mafias so that the States establish and maintain laws against the legalization of different drugs. It is a dream come true for any type of organization that is dedicated to the trade of a certain product.
When a prohibition of marijuana or other drugs is established, a clear message is being sent to the different employers of this country: In this sector there is a legal entry barrier, by which the State will impose sanctions and prosecute both producers and to customers.
Mafias are born that are dedicated to the production and distribution of drugs in the black market. These mafias operate in certain areas, for which a monopoly is established.
The benefits for a monopoly are clear, it becomes the sole producer, and consequently it will be able to establish substantially higher sales and distribution prices, as opposed to a competitive market alternative in which multiple bidders would be willing to produce the different drugs.
However, in the mafias the rules of the game are different: The one who competes is eliminated (literally). In fact, it is common for the different mafias to live in coexistence when they “control” a territory and there are “disputes” when a mafia sees that another mafia has entered its territory.
As a result, a monopoly emerges that receives extraordinary benefits that involve the accumulation of weapons or different bribes to remain an exclusive producer and distributor. Therefore, high levels of crime appear.
The economic consequence in the legalization of drugs would be a general decline in prices compared to the black market alternative as many entrepreneurs would start producing, in the most efficient way possible. However, this statement is temporary since the States have some fixation with these products and tax them with Special Taxes.
Mafias do not make sense in an environment of legalization, so their business would be seriously damaged by the decline in revenues that would partially or fatally sink the criminal structure that is generated in their environment. We would therefore see a decrease in crime levels. Right?
Arresting and prosecuting these crimes is very costly for any criminal justice system. We find that too many are identified in the criminal justice system for minor and non-violent crimes, using a broad police structure specialized in this type of crime.
From the point of view of the State, the legalization of drugs would imply a saving for the taxpayers, both for the cost of identification and punishment to the consumer and for the persecution of the mafias.
For consumers, the consequences are clearly harmful. On the one hand, they consume drugs at higher prices compared to a competitive alternative and on the other hand, there is a serious risk to health, not because of the consumption of drugs, but because of the substances used to alter the composition of the drugs they generate – a volatile drug that can be too strong or too weak at any time, leading to overdoses.
The State always seeks its part
While the legalization of drugs would allow a general decline in prices compared to the monopolistic alternative of mafias, states tend to impose a series of special taxes for collection purposes on these types of products that would lead to an increase in prices.
Although a competitive market will start, if a State decides to tax the product with special taxes, the producers would see the final price more expensive. This would lead us to the conclusion that the income obtained by the structure of the monopoly that forms the mafia would go, to a greater or lesser extent, to the public accounts.
What did we learn with the Dry Law?
The prohibition of alcohol in the United States lasted 13 years from the year 1920 until the end of 1933. While the intention was to reduce alcohol consumption by eliminating the businesses that manufactured, distributed and sold, the plan failed miserably.
The mortality rate due to alcoholism was reduced by 80% in 1921 with respect to pre-war levels, while alcohol-related crimes decreased significantly. However, seven years after its entry, the total number of deaths due to adulterated liquor surpassed the initial figures and there were many more cases of blindness and paralysis.
Enforcing the law proved to be almost impossible with the emergence and spread of contraband. The original congressional appropriation for the application of the law was $5 million. Several years later, the Government estimated that the application of the law would cost 300 million dollars.
The impossibility of restricting contraband and the inevitable corruption that accompanied it, finally led to widespread public disenchantment with Prohibition and its abolition on December 5, 1933.