Cannabis — or marijuana, or pot, or weed — comes from the Cannabis sativa plant and is one of the most widely available illicit drugs in New Zealand. Until 2020, Penalties associated with cannabis range from a $500 fine for possession to a 14-year jail term for its supply or manufacture.[1] Legalising cannabis has been a heavily debated topic in New Zealand for decades.[2]

The 2020 New Zealand cannabis referendum was a non-binding referendum held on 17 October 2020. The official results were released on 6 November 2020 with 50.7% of voters opposing legalisation and 48.4% in support (with 0.9% informal votes). Auckland Central MP Chlöe Swarbrick, a spokesperson of Green Party, says "as a country, we've come so far in understanding the need to reduce the harm of drugs by bringing them out of the shadows." SayNoToDope campaign spokesperson Aaron Ironside says that the mental health system is strained and legalising the drug would have added to social harm. "The use of cannabis is associated with increased risks of a number of adverse outcomes including educational delay, welfare dependence, increased risks of psychotic symptoms, major depression, increased risks of motor vehicle accidents, increased risks of other illicit drug use, and respiratory impairment," Ironside said.[3]

Prime Minister Jacinda Ardern has said some of the issues legalisation sought to address - including referring cannabis users to health services rather than the justice system - will be looked at regardless of the referendum result.[3]

Reference:

• [1]  Cannabis and the law (Links to an external site.), retrieved on 12 November 2020, New Zealand Police
• [2] The cannabis debate: What are the costs and benefits of legalising it? (Links to an external site.) Oct 20, 2017, stuff.
• [3]  Election 2020 final results: Special votes close gap; Cannabis referendum still fails (Links to an external site.), NZ Herald, Nov 6, 2020.

Tasks:
Read two articles

• Is Marijuana Legalization Economic Salvation or Hype? (Links to an external site.) November 25, 2018, Forbes.
• If reducing harm to society is the goal, a cost-benefit analysis shows cannabis prohibition has failed (Links to an external site.), September 8, 2020, Stuff.

1. In the essay, you are expected to use the concepts and the analytical tools learned in this course to discuss the economic implications of legalising cannabis (marijuana).

In 2012, Colorado and Washington become the first two states to legalize the recreational use of cannabis in the United States.

1. Using the concepts of demand and supply, explain why cannabis prices declined sharply by 70% in Colorado between 2014 and 2018. Use a diagram of the cannabis market to illustrate your point.
   Hints:

• Was the market of cannabis perfectly competitive before legalization? Who were mainly involved in the business of cannabis at that time? (Some Hollywood movies may help you find the answers.) Was the business of cannabis profitable at that time? Why?
• How did legalization affect the number of cannabis sellers and buyers in Colorado in 2014 and in 2018, respectively? [In the United States, the recreational use of cannabis was legalized only in 4 states in 2014, while it was legalized by 15 states and Washington D.C. in 2018. Please notice that people from elsewhere may travel to Colorado or other states where the recreational use of cannabis was legal for consuming cannabis.]  
• How would cannabis legalization in other states affect the market demand and supply in Colorado? Did the supply effect dominate the demand effect or the other way around? Why?

2. With the help of a numerical example, explain why California and Maine tax cannabis by weight rather than by price.
   Hints:

• Suppose that the government tends to maximize the tax revenue.
• How would the cannabis price drop affect the government tax revenue if cannabis was taxed by price?
• Did the government anticipate the cannabis price drop when designing the tax scheme?
• You may come up with an artificial numerical example to support your findings.

3. Using the concept of substitutes and complements, explain with the help of a diagram how legalising cannabis may possibly affect the sales of alcohol and cigarettes. When the State government evaluates the effect of legalising cannabis on tax revenue, should it look only at the sales of cannabis? Or, should it also consider the changes in the sales of alcohol and cigarettes?

Hints:

• are alcohol and cigarettes substitutes or complements of cannabis?
  (The answer to this question depends on the actual consumption data. If you do not know the data, you may make an assumption. Then, you should stick with this assumption for the rest of your analysis. For example, if you assume that alcohol and cigarettes are substitutes of cannabis, then your entire analysis is based upon this assumption.)
• How would the change in the price of cannabis possibly affect the market demand curve for alcohol/cigarettes?