Question

This question is on public Finance.

3. The state of Minnesota is considering legislation to legalize recreational marijuana (cannabis).

a. Discuss all possible externalities associated with legalizing cannabis. Using a graph, diagram one of the externalities and explain your graph. Make sure it is properly labeled.

b. Minnesota will tax the sale of cannabis. What is the socially optimal use of the tax revenue? Should Minnesota use that tax revenue to fund public education? Why or why not? Explain.

Answer 1

There is a negative externality in consumption with legalizing cannabis. Here as we consider consumption ( which is related to consumers) hence marginal social cost and marginal private cost will be same and equal. Here the consumer by consuming cannabis obtains utility that is marginal private benefit but it decreases the utility of everyone around that person that is marginal social benefit as a result of that marginal social benefit curve will lie below the marginal private benefit curve. In the following diagram we can see that due to marginal external cost the marginal social benefit becomes less than the marginal private benefit.

due to this impact the optimum level of output which is desirable for the society is Qo and the desired price is Po but when the market is left without any intervention and in the presence of externality it cannot reach the optimum level. Thus there is an overconsumption problem as firm produces Q1 amount of quantity and P1 amount of price at e1.

Due to this the government imposes an amount of tax as same as that of the marginal cost in order to cope up with externalities. Because of the tax imposition, the demand curve will shift downward by the amount of tax and will be equal to the marginal social benefit. This policy adopted by the government will raise the prices of cannabis in the market and will lead to the decrease in the consumption and thus decrease the negative externality.

the tax revenue collected can be used in order to reduce the repeated criminal offences, can be used to run various education programs in order to make people aware of the various health issues that might occur due to this, can be used for various public health programs and so on.

one has to understand that taxing addictive goods can lead to do more crimes because people need to pay more for the things that they have made a daily habit of, hence in order to get more money people can actually commit more crime in order to get more money to buy these goods.

Hence i feel that Minnesota should invest more and more in public education in order to make the children aware of the various health diseases that can occur in the primary level. It is indeed a long-term concept that we are dealing with but we can certainly hope that by education we can actually make our children aware about these drugs and hence they would not commit the mistakes this generation did.