Question

1. The price elasticity of demand for marijuana is 0.5. The war on drugs currently focuses on efforts to interrupt the supply of marijuana through interdiction efforts. (a) Given the elasticity of demand for marijuana, what is the unintended consequence on drug dealers’ revenues that result from successful interdiction efforts? Explain your answer. (b) Colorado’s tax on recreational marijuana was implemented to raise badly needed revenue for government. Will this tax increase tax revenues, or fall short of expectations? Explain your answer. (c) Who bears the economic burden of the tax, and why?

Answer 1

a. The successful interdiction efforts will disrupt supply in the econoy and this will lead to increase in the level of equilibrium price in the economy. Since the demand elasticity of marijuana is relativley inelastic, this will lead to increase in drug dealer's revenue necause quantity demanded will change by a lesser amount as compared to price due to supply frictions.

b. This tax will increase tax revenue for the government because demand of the good is inelastic and in case of inelastic demand of the good, the tax revenue of the government will increase.

c. Since supply is more elastic than demand, thus, consumers bear most of the economic burden of the tax.