Question

Background to the question

Over the past few years some states in the United States have begun to legalize marijuana, while other states have not. In addition to legalizing marijuana, some states, such as California have introduced a tax on all marijuana products.

QUESTION

You are hired as an economic consultant by a state government that would like to analyse the impact of legalization of marijuana, taking account of different potential market structures. In your answer you should use appropriate models (and diagrams) studied in class.

Assume for now that the marijuana market is a single-price monopoly where market demand is linear and downward-sloping and the suppliers’ marginal cost is upward sloping.

3. The state government tells you that the alcohol (i.e., liquor, wine and beer) industries have expressed concern about the legalization of marijuana and how this might affect their sales. Explain to the state government why the alcohol industry might be concerned about their sales. (3 marks)

Answer 1

Well legalizing marjuba will reduce demand for alcohol these goods are substitutes. Thus demand shifts from D to Do. As a result price and output of alcohol traded fall which will ultimately decrease profits of alcohol traders