Question

Recreational marijuana was legalized in the state of Washington in July of 2014 creating a new source of revenue for the government. July 1, 2015, the state government raised excise taxes paid by marijuana retailers on final sales leading to the following effects on prices and quantity sold:

Date	Quantity Sold (average grams per day)	Price (per gram)
June 2015 (pre tax change)	310.0	13.18
July 2015	307.0	13.48
August 2015	303.1	13.48

The above example is adapted from a recent study into the effects of an increase in taxes on the marijuana market in Washington (Hansen, Miller, & Weber, 2017). The authors can estimate the price elasticity of demand from these data points because the sudden tax change created a ceteris paribus situation, where all other supply and demand conditions were held fixed, similar to the way our models assume in the textbook.

In that spirit, interpret the excise tax increases as an increase in input costs for marijuana dispensaries holding all other supply and demand characteristics fixed.

What happened to demand and the demand curve after the tax?

Answer 1

As an increase in excise tax will increase the input cost for marijuana it will affect the supply curve only. So, our demand curve will not change due to the increase in excise tax. In eqm our demand curve will be a downward sloping and supply curve will be upward sloping.

After the increase in tax rate which is taken as an increase in marginal increase in input cost, it will shift the supply curve to the left.

Here, at our new eqm the demand curve will remain unchanged and thus due to the shift in supply curve our prices will increase as we see the prices actually increased from 13.18 to 13.48 usd, and there will be a reduction in quantity i.e, the quantity of marijuana will decrease which is also shown in the above table.