AN ECONOMIC PERSPECTIVE ON THE LEGALISATION DEBATE: THE DUTC

[Puffin13]

AN ECONOMIC PERSPECTIVE ON THE LEGALISATION DEBATE: THE DUTCH CASE
By Martijn A. Boermans, The Amsterdam Law Forum
28 October 2010

This paper reviews how economic modelling provides a deeper understanding of drug markets. The exercise focuses on ‘soft drugs’ (cannabinoids) in the Netherlands and outlines the effects of prohibition and legalisation. The purpose is to present an overview of analytical tools to non-economists. Based on a basic supply and demand framework the impact of enforcement, externalities, producer incentives and demand elasticity are highlighted. Results indicate that social welfare is maximized under legalisation given limited externalities associated with consumption and price inelastic demand. We recommend a liberalized soft drugs market that requires inter alia taxation, complemented with various health measures like quality controls and public campaigns. The Dutch case is exemplary, as this economic perspective offers universal building blocks relevant to the legalisation debate in other countries, and potentially to other substances.

For a full text see here.

Conclusion

The propositions presented above provide us with a common understanding of the economic forces within the drugs market. This paper focused on a tentative interpretation of the Dutch drug policy. Key assumptions driving any policy recommendation from an economic perspective are the price elasticity of demand and externalities involved with consumption. A key point many economists have made is that the market structure causes most of the negative externalities, and not necessarily drug consumption; this is obvious in the Netherlands where consumers generally do not fear prosecution.

Two propositions derived from the core model are that i) prohibition hurts consumers and leaves rents to producers, ii) enforcement not only increases the price of drugs but under inelastic demand, enforcement pumps disproportionally more resources into the drug market because consumers and producers alter their behaviour in illegal goods markets. A corollary shows that higher punishment causes an adverse selection process, where only the ‘toughest’ producers remain while earning even more profits and causing greater negative externalities such as increased criminal activity. In other words, prohibition of drugs shifts the supply curve upward. Enforcement and punishment are effectively a tax on suppliers, which raises their production costs and allows them to profit. Prohibition shifts the demand curve downward and lowers consumption, although it was discussed why this deterrent effect is arguably small. Taking these factors into account together implies higher drug prices under prohibition, which is a disadvantage for consumers. Under prohibition the producer surplus results in negative externalities including criminal activity, health problems, distorted education and moral stigmas.

In legalized markets, producers lose the possibility of profits and prices drop to a competitive level. In order to balance the possible rise in consumption, government can apply a Pigouvian tax system to raise prices, lower consumption and obtain income transferred from consumption; yet, only up to the point where externalities from consumption can be paid back for. Hence, under legalisation the government earns some income and saves in costs typically put towards enforcement, while compared to prohibition, consumers are better off and producers cannot profit.

In order to estimate the impact of legalisation in the Netherlands a simple mathematical and conceptual model was demonstrated. As there is so much uncertainty about possible policy implications, it is proposed first to levy a tax on drugs that does not extensively affect the current price level. Based on preliminary back-of-the-envelope calibrations one can expect a yearly ‘net’ tax gain of up to 850 million euro in the Netherlands. It is not a concern that legalisation of soft drugs may cause a rapid rise in consumption, because the good is already widely available and prices are kept constant. Regulation and taxation can mitigate consumption and negative externalities though price effects and tax income. The core pillars of Dutch drug policy should remain and they would be strengthened under legalisation.

The Amsterdam Law Forum is an open access initiative supported by the VU University Library.

Source

[TwoCanucks]

Interesting read. I checked out the full article, and it's surprising that the Dutch only spend $150million euro annually on soft drug policing.

It also mentions that Cali will see a net benefit of $1.4billion US if prop 19 goes through. that number can't be ignored... $1.4billion!!!!

[xXEXCALABERXx]

Interesting read. I checked out the full article, and it's surprising that the Dutch only spend $150million euro annually on soft drug policing.

It also mentions that Cali will see a net benefit of $1.4billion US if prop 19 goes through. that number can't be ignored... $1.4billion!!!!

Thats certainly a lot of money, but how many pharmaceutical companies dont want it to happen as a loss of taxes from 1 major pharmaceutical company ie for 1 drug the irs received 3.4billion!! kinda puts into perspective the kinda forces at work here who may have a lot to lose.

Does it take into account the potential loss of revenue for things pharmaceutical companies taxes the less they sell the less taxes they pay. How many working days will be lost coz we think fuck it lots go get blazed? Im all for legalisation dont get me wrong but the battle wont be won based on economics as on the larger scale the revenue generated wont be that significant.

[Iko]

Interesting read. I checked out the full article, and it's surprising that the Dutch only spend $150million euro annually on soft drug policing.

It also mentions that Cali will see a net benefit of $1.4billion US if prop 19 goes through. that number can't be ignored... $1.4billion!!!!

Thats certainly a lot of money, but how many pharmaceutical companies dont want it to happen as a loss of taxes from 1 major pharmaceutical company ie for 1 drug the irs received 3.4billion!! kinda puts into perspective the kinda forces at work here who may have a lot to lose.

Does it take into account the potential loss of revenue for things pharmaceutical companies taxes the less they sell the less taxes they pay. How many working days will be lost coz we think fuck it lots go get blazed? Im all for legalisation dont get me wrong but the battle wont be won based on economics as on the larger scale the revenue generated wont be that significant.

I think it has been proven already in California that ready available pot does NOT mean people stop taking there meds.
If anything if prop.19 passed which it wont, the pharmy industry stands to make alot of money investing in there own pot they could breed with there unlimited resources.

[dope_demand]

Can you imagine the weed you could come up with with the resources, knowledge and budget of a major pharmaceutical company. However i dont think they think along the same lines as us as to what is good cannabis!

[ZBeebs]

That 1.4 billion is just for California...not the whole USA....would be many times that if it spread across the country.

[xXEXCALABERXx]

Yes I know its only california but the 3.4 billion was only 1 particular drug also. Like i say all for it but dont think it will be passed on an economic basis nor a medical one. Until the middle class' accept and understand that society wond crumble just because people smoke dope is what will pass it. Understanding by criminalizing it they are pushing a lot of good people into world of crime, maybe fractionally for some more for others.