Write a memo (3 to 4 pages) that explains the economic impacts of the policy below.
Marijuana legalization and taxation. Your job is to explain the impacts of a policy of simultaneously legalizing and taxing marijuana (using an excise tax). We have discussed the legalization aspects of this policy. The diagram attached below depicts the impact on the marijuana market. You will probably want to additionally say something about how the tax revenue will be shared between consumers and producers, which you should be able to figure out yourself. You also know how to analyze the impact of a price change on the markets for substitutes and complements. Your job is to explain the impact of the policy on price, quantity, consumer and producer surplus, complements and substitutes, and anything else that you think you may be able to shed light on using the tools we have been learning. Provide minimal background. (Primarily because I don’t want you to waste time on the internet learning about the real-world marijuana market.)
A large part of the analysis has been done for you, and appears in a single diagram SEE DIAGRAM BELOW
Your explanation must make sense to a reasonably well-educated non-economist. Keep in mind, you must write it so that a lay person without economic background can understand it. To do this, you must first understand the analysis very thoroughly yourself. Test your explanation on friends and family. Note: DO NOT include a diagram and DO NOT search online.
Do not do any additional research on the issue. The purpose of the memo is to come up with the best way to explain the impact of the policy on society.
No executive summary.
Minimal background (If it isn’t strictly necessary for understanding your memo, cut it out.)
Assumptions:
Assume that there are no secondary impacts from either growing or consuming marijuana such as environmental impacts, health and safety impacts, etc, and that there are also no secondary impacts from consumption or production of complements or substitutes for marijuana. These things will be the topic of section 5 of the course.
Assume that consumers have complete information and perfect rationality with respect to the short and long-run effects of consuming marijuana and any other substance they might consume.
Assume that if there are impacts on complements or substitutes, there will be no change in consumer or producer surplus in those markets, even if there is a shift in demand. (If you want to understand why this is a reasonable assumption, take my Benefit-Cost Analysis class.) This doesn’t, however, mean that a policy maker would not want to know about effects in these secondary markets.
Assume that alcoholic beverages of various kinds are substitutes for marijuana.