Marijuana on Main Street

By Liana Jacobi

Consumption and tax revenue in a legalised environment

Applied econometrician Liana Jacobi considers the implications of a legal cannabis market

Cannabis is the most widely used illicit drug in Australia and worldwide. The long-running legalisation debate gained momentum earlier this year when the Federal Government passed new laws to pave the way for the use of medical cannabis.

Despite both recreational and medical use at present being illegal in Australia, the country ranks among the highest in the world for marijuana use. According to the Australian National Drug Strategy Household Surveys (NDSHS), 13 per cent of Australians aged 14 and above used marijuana in the 12 months prior to the survey, with teenagers and young adults in their twenties making up most of the users. Over 40 per cent reported having used it at some point in the past.


In the current ‘black market’ environment, it is difficult to predict the effects of legalising cannabis for recreational use. However, our research, the first of its kind in the world, uses economic modelling to shed some light on the implications of a legal cannabis market. What is clear is that the drug market, like any other, is one of supply and demand, with demand depending on price, quality and such demographic factors as age and gender.

However, unlike a product such as, say, milk, it cannot be bought in the local supermarket. Only about 50 per cent of the NDSHS respondents reported having ready access to marijuana, and, of those, roughly a quarter said they ended up using the drug. Therefore, not everyone with access necessarily uses. Those who are eager to use are more likely to know how to get it. Illegality was deemed a serious hurdle by 16 per cent of the respondents who said it was the main reason for not using marijuana.

Legalisation would make marijuana widely available to be bought like other legal drugs, such as alcohol. Currently marijuana is only available on the black market and from dealers who also often supply more harmful illegal drugs. Suppliers face potentially heavy criminal penalties including prison if caught. And while many states in Australia have decriminalised use to some degree, users still face penalties and possibly a criminal record when caught with a small amount of marijuana for personal use — something that can have a significant impact on a person’s ability to function in society. For example, it may be more difficult to get a job, secure a rental property, or secure a loan. We find that the fear of legal consequences lowers the use in all age groups in the current environment.

Our findings indicate that while legalisation would increase marijuana use, it would not turn the country into a nation of potheads. Overall use would increase from 13 per cent to 19 per cent in the Australian population aged 14 and older if prices remain unchanged. We also found higher projected use among people who now have access to illegal cannabis than those who don’t.  While use increases among all age groups, the highest increase is among people in their thirties and older. We observe the smallest relative increase among teenagers and young adults, as these groups have the highest access before legalisation.

Marijuana graph
Marijuana use before and after legalisation

Our model predicts that Australia could raise a minimum of between AUD70 million and AUD220 million in taxes (or far more depending on the tax scheme employed and the demand for legalised marijuana) that could be used, for example, to fund education or other social programs. The recent legalisation of cannabis in Colorado has provided us with a unique experiment to benchmark the predictions from our model. For a state the size of Colorado, our model predicts tax revenues of $68.2 million annually — assuming a tax rate of 25 per cent that is reduced to $61.5 million a year when allowing for losses to the black market. Colorado’s tax office reported that it collected $56.1 million in taxes from the sale of marijuana (excluding medical use) in 2014, most of which is used for school construction and state programs. With Australia’s population well over four times the size of Colorado’s 5.4 million, we would expect it to raise taxes well in excess of AUD250 million.

Legalisation would provide a safe-sale environment with no judicial risks. However, it would require restricted use for underage individuals similar to alcohol and cigarettes. Whether this would encourage higher numbers of teenagers and young adults to seek supply from alternative sources is yet to be seen. Unfortunately, taxes and higher prices are only a very limited tool to curb use after legalisation. Our research shows only a very moderate response to higher prices. We find that even with restrictions on access for underage users after legalisation, the average price per gram of marijuana would have to increase four-fold to keep use as low as before legalisation in this vulnerable age group. Such an increase is not feasible as most users would resort to the black market.

By combining a new economic framework that takes into account the role of restricted access to cannabis and the impact of illegal behaviour on the decision to use marijuana, we have provided answers to some of the questions fuelling legalisation debates in Australia and globally — answer that are essential for informed debate and the formulation of effective policy discussion and implementation.

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