Assessing the costs and benefits of legalising cannabis

When government revenue is included, legalising appears to trump the status quo. Philippa Willitts, CC BY-NC

About one-quarter of Australians support the legalisation of cannabis. And advocates often point to the potential of raising tax revenue from sales as part of their argument. But there has been limited analysis of the economic costs and benefits of legalisation – until now.

A study we published today in the journal PLOS ONE compared the status quo with legalisation. We found that when using the standard cost-benefit framework which excludes government revenue, neither policy delivered substantially more economic benefits.

But when government revenue is included, legalising appears to trump the status quo.

Two options

The status quo in New South Wales is that juveniles found in possession of 15 grams or less of cannabis may receive a warning or a caution, and adults can receive up to two cautions. Those convicted for cultivation or for selling cannabis may get a fine or go to prison.

Our hypothetical legalisation policy, in contrast, was developed from a public health framework of regulation and harm minimisation. It incorporated some of the many lessons from tobacco and alcohol research including:

  • limiting outlet density
  • no advertising
  • requiring plain paper packaging
  • requiring consumer licences
  • restricting sales to those aged 21 and over.

Other elements of the hypothetical policy included:

  • ongoing drug-driving testing
  • licensed commercial growers
  • a regulatory board to set prices
  • government as monopoly distributor and retailer.

We chose a government monopoly as a way to limit lobbying and avoid claims of anti-competition from the industry, as has occurred with the tobacco industry.

Costs and benefits

A cost-benefit analysis such as the one we undertook provides an estimate in dollars of both the gains and losses to individuals and to the wider society for each policy. A policy is said to be socially desirable, and have a positive net social benefit, if the overall sum of the positive benefits outweighs the sum of the costs and harms.

Deciding whether something is a harm or a benefit is not necessarily straightforward. Some, such as the sense of well-being users gain from consuming cannabis, is a clear benefit to them. Obvious harms are the consequences of dependence, and the potential decrease in educational attainment in young persons who consume cannabis frequently.

However, less straightforward is stigma from a criminal record for possession or use of cannabis. Many see this as a harm whereas others see this as a benefit, and a way to deter cannabis use.

The net social benefit is the difference between the benefits and the costs. Katherine Hitt, CC BY-ND

The list of costs includes the financial burden of legalising marijuana on the criminal justice system (police, courts, corrections services) and the health-care system (from dependence, mental illnesses attributed to cannabis, and death from accidents). Added to this are regulatory costs, and consumer education and quit campaigns.

We attributed a 2007 Australian dollar value to all these costs, harms and benefits and then summed each policy option to obtain the net social benefit.

The verdict

The net social benefit (the difference between the benefits and the costs) was positive for both policies.

To illustrate the uncertainty around each of the estimates, we provided a mean figure and a 5-95% range. The mean net social benefit for the status quo was A$294.6 million (A$201.1 to A$392.7 million) and for the legalised–regulated model it was A$234.2 million (A$136.4 to A$331.1 million).

Both estimates fall within the same range. This indicates that both policies result in a similarly efficient use of resources.

But there’s a difference in who bears the costs and who benefits. For the status quo, for example, expenditures within the criminal justice system are higher, whereas in the legalised option the negative impact on educational attainment is greater.

Not included in the above results are potential revenues to government, as they are considered transfers and not normally included in a cost-benefit analysis.

When the revenues were added – after removing payments to growers and the costs of operating the cannabis shops – the net social benefit increased. In fact, it more than doubled to A$727.5 million, as did the level of uncertainty (it could be anywhere in the range of A$372.3 million to A$1,113.2 million). This suggests there may be gains for government coffers under legalisation.

But while the revenues are potentially large, so is the uncertainty around these numbers. Other researchers have argued, for instance, that the price of legalised cannabis would likely have to fall substantially to undermine the existing black market. This drop in price would likely lead to a negative impact on government revenues, may result in additional consumption and increased harms.

We may soon see data emerge on the harms, benefits and revenues from the introduction of legalised cannabis in the US state of Colorado. But it may be some time before true figures are known, especially given the recent revamping of budgetary expectations in that state.

Given the uncertainty around the extent of the potential revenue gains and the similarity in net social benefits from both policy options, drivers for change are more likely to be political and based on public opinion, rather than economic arguments.