Reference no: EM131042894

What will happen to the price of marijuana if the purchase and sale of marijuana are legalized?

Marijuana legality for several uses use in different countries varies. It is illegal to possess marijuana in most of the countries and it is this way since the widespread prohibition of marijuana began in the late 1930s. However, the possession of small quantities of marijuana is decriminalized in many countries especially in North America, Europe and South America.

Therefore in countries like US, if the purchase and sale of marijuana is legally recognized, definitely. The demand curve will shift to the right (as people use more), raising both price and quantity demanded. The supply curve will also shift to the right (since it will become easier to supply), raising quantity demanded but lowering price. Quantity will rise, but the net change in price depends on how much each curve shift.

The following assumptions hold in this case;

1) when legalized the production costs are lowered hence leading to lower prices for any given quantity sold. I.e. Supply curve shifts outward; right and down (increasing supply).

2) Marijuana can be considered an addictive product, and therefore the demand curve for marijuana is inelastic.
"Marijuana demand is not completely elastic: Nisbet and Vakil estimate the elasticity of demand for marijuana to be in the range of -1 to -1.5, compared to tobacco, which is relatively less elastic, at -0.7. Thus, total marijuana consumption is more responsive to price increases" (yaleeconomicreview.org)
The supply curve will shift down and to the right is because producing in a black market is expensive. Once legalized, producers can produce openly with lower production costs. For any given quantity, the cost and hence the price of production will be lower."Marijuana legalization would likely lead to a decrease in prices because the current risk premium being charged for supplying the illegal substance would vanish once legal sanctions are removed". (yaleeconomicreview.org)