California legislative committee has voted to legalize

Reference no: EM13455696

A California legislative committee has voted to legalize marijuana, sell it through state liquor stores, and impose a $50 per ounce tax on it, as a way of solving the state's budget deficit problems. A study by the Rand Corporation reports that the street (retail) price of marijuana in California is $75 to $100 per ounce; however legalization is expected to reduce production costs.

If marijuana was legal, the commercial supply of marijuana in California would be given by: P^s=25+Q^s or Q^s=P^s-25, where Q is the quantity supplied in millions of ounces, and P is the price per ounce.

The demand for marijuana in California is given by: P^d=150-4Q^d or Q^d=37.5-0.25P^d

1) Graph the before tax supply and demand for marijuana, and work out the equilibrium price and quantity.

2) Suppose a $50 per ounce tax on marijuana is implemented. Using the fact that P^d=P^s+tax, substitute for P^d in the demand curve. Draw the after-tax demand curve in terms of P^s on your diagram from part (1).

3) Work out the after-tax quantity and prices. What is the economic incidence of a marijuana tax? How much revenue does it raise?

4) Redraw your diagram from part (1). Using the fact that P^s=P^d-tax, substitute for P^s in the supply curve. Draw the after-tax supply curve in terms of P^d on your diagram. Confirm that this gives you the same results as the method used in parts (2) and (3).

5) Marijuana - unlike alcohol or tobacco or gasoline - is a low maintenance plant that can easily be grown in one's backyard or a kitchen window. Suppose that, if marijuana is legalized, the marginal cost of home-grown marijuana (of equivalent quality to store-purchased) is constant at $55 per ounce. How does the existence of an untaxed, home-grown supply of marijuana change your analysis in part (4)? What happens to prices, quantities, and government revenue? Use a diagram to work out your answer.

Reference no: EM13455696

Questions Cloud

Explain the electronic human resource management and point : define electronic human resource management and indicate its implications for five hrm

What is the value in a diverse workplace that is inclusive : 1.what is the central focus of all human service programs? why is this focus paramount to human service workers?2.how

Make a distinction between disparate treatment disparate : distinguish between disparate treatment disparate impact and reasonable accommodation theories of discrimination in

What can the united states health care system learn from : what can the united states health care system learn from health care systems such as universal health uhc or

California legislative committee has voted to legalize : a california legislative committee has voted to legalize marijuana sell it through state liquor stores and impose a

Outline and assess those events leading to the rise of : 1. outline and assess those events leading to the rise of islam in the early 7th century ce. who was mohammed the

Researchnbspeffective listening strategies to employ : researchnbspeffective listening strategies to use during a counseling interview process in university

Explain why is understanding patients accounts important : why is understanding patients accounts important for health care administration and mangement professionals?how do you

Compare reagans berlin wall speech with kennedys earlier : 1-compare reagans berlin wall speech with kennedys earlier speech in berlin. which do you think does a better job of

User Account

All Pages