Supply and Demand Essay

Submitted By tylervirtue
Words: 1532
Pages: 7

Tyler Virtue
4/22/12
Eric Hoyt

Medicinal Marijuana

This article from CNN News captures the new market of medicinal marijuana in the state of Colorado. Medicinal marijuana has been legal in Colorado since 2000 but the state has recently eliminated a quantity control that was placed on the amount of patients one business can supply. The article explains that the demand for medicinal marijuana has always been strong but the supply has never been able to fit the amount of consumers. Now that there is no more quantity control by the government, the industry is booming and the supply is now living up to the expectations of demand. The government taxes this new good and the immense amount of consumers makes it a great source of revenue for the government. The tax affects the price of the goods and plays a role in the pricing and purchasing of different amounts of marijuana. The article titled “Colorado’s Green Rush” does a great job of explaining how quantity controls affect the markets equilibrium and how the release of it created an increase in the market. The microeconomic concepts of quantity control, supply and demand, and taxation are all well represented by the new market explained in this article. Medicinal marijuana was made legal in Colorado in 2000. The demand has always been extremely high. The industry was very small and there was only a small amount of supply because of a restriction on quantity placed by the government. This would cause little incentive for a business to enter the market. With only five patients, there isn’t much expectation to gain a profit. The small supply would cause the price to be more expensive in order to make money. Suppliers were normally just small caregivers with licenses to supply medicinal marijuana to five patients. They were hardly businesses or companies. The small revenue gained from barely any patients wasn’t enough to support and create a strong company with multiple employees. Figure 1.1 shows how the extremely high demand with a miniscule supply implemented by the quantity control would affect the market equilibrium price.

The quantity control placed by the state government of Colorado was lifted in 2007, and every since the business has soared. The release of this control would extremely benefit both producers and consumers, allowing more costumers to be supplied at a lower price. This concept is very similar to the example of the cab drivers licenses presented in chapter five of Krugman and Wells. The example explains that there is a control on taxicab licenses so a license becomes very valuable. The textbook illustrates the undesirable economic consequences of a quantity control. Restrictions on taxicab licenses are explained as “since the quota discourages mutually beneficial transactions, it creates a deadweight loss.” (Krugman and Wells 135) The quantity control negatively affected the medicinal marijuana market in Colorado because it prohibits mutually beneficial transactions from happening. The release of the control had a vastly beneficial impact in the market. This shifts along the supply and demand curves are illustrated in figure 1.2.

Another result of a quantity control besides the deadweight loss that is created is the incentive for illegal activity. This is extremely common in the market for marijuana. If the government controls the quantity, it might not be worth it for a business to only sell to a few costumers, they might not make any profit. This quantity control could very well lead to the illegal selling of marijuana to unqualified patients that don’t have medicinal marijuana cards issued by doctors. If the selling medicinal marijuana were not allowed in a state, similar to a quantity control of zero, then there would be a huge black market for the purchasing of illegal drugs. A black market is very common in areas where there is a quantity control on the amount of consumers a medicinal marijuana provider can supply. The release of this…