DP13814 Defeating Crime? An Economic Analysis of Cannabis Legalization Policies

Author(s): Emmanuelle Auriol, Alice Mesnard, Tiffanie Perrault
Publication Date: June 2019
Date Revised: June 2019
Keyword(s): Cannabis, crime, legalization, policy, regulation
JEL(s): I18, K32, K42, L51
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13814

Can legalization of cannabis eliminate related organized crime? We model consumer choices for cannabis in a risky environment and determine the provision of cannabis, under prohibition and legalization. Although a legalization policy may crumble the profits from illegal providers driving them out of business, it also increases cannabis use. In contrast, repression decreases cannabis consumption but strengthens the cartelization of criminal networks. Combining legalization with repression can strangle the black market while controlling the demand for cannabis. Based on evidence from the US, policy simulations are used to compute the price of legal cannabis that would achieve this dual objective and highlight the complementarities between repression and legalization. For example, with a 1% probability of arrest and a USD 2000 fine for illegal purchase, a legal price around USD 439 per ounce would evict illegal suppliers and increase the consumption by less that 25%. If the probability of arrest reaches 2%, the eviction price can go up to USD 622 and overall consumption increases by no more than 5:5%.