New York’s 13% Cannabis Tax May Be Too High Some experts say New York’s 13% tax may be too high to compete with a popular illicit market.

But it’s better than the original plan to impose a 20% tax, which would allow the illicit market to continue to thrive.

Assume that the marginal cost of producing a gram of marijuana (legal or illegal) is a constant $10 and that legal marijuana bears a tax of $2 per gram.

a. Draw a graph of the market for marijuana, assuming that there are no penalties on either buyers or sellers for breaking the law.

b. How does a $2 tax change the market outcome?
Show the effects in your graph.

c. With no penalty on buyers, if a penalty for breaking the law is imposed on sellers at more than $2 per gram, how does the market work and what is the equilibrium price?

d. With no penalty on sellers, if a penalty for breaking the law is imposed on buyers at more than $2 per gram, how does the market work and what is the equilibrium price?

e. What is the marginal benefit of an illegal gram of marijuana in the situations described in parts (c) and (d)?

f. Can legalizing and taxing marijuana achieve the same quantity of marijuana use as occurs if marijuana is illegal?