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 can you say about the equilibrium quantity supplied and demanded?

Answer 1

Since we have to interpret the increase in excise tax as an increase in the input costs for marijuana, it will cause the supply curve to shift towards the left. This means, the demand curve will remain the same.

If the demand curve remains the same and the supply curve shifts to the left, we will expect a decrease in eqm quantity of marijuana and an increase in the price for marijuana.

This is what we see in the given table.