Saturday, 17 October 2009


Dave Prychitko wonders whether marijuana legalisation would really prove all that stimulating. Yes, measured GDP would increase, but that would largely reflect currently unmeasured activity becoming formally measured: consequently, much of the increase would be spurious.

I disagree. Right now, firms in the illegal sector have to undertake very costly activities to avoid detection and enforce contracts. Moving to the legal sector would transform these deadweight costs into a mix of surplus and tax revenue. In short, legalisation would provide a technology shock to the industry, allowing it to operate far more efficiently. If government can do better than completely wasting the tax revenues collected, then the transformation is efficiency-enhancing. And let's not forget the efficiency gains from reallocating police time and energy to preventing crimes that have actual victims (or simply shrinking police budgets).

Prychitko is right that simply counting things that are already going on doesn't count as stimulus. I'd look instead to the gains from the productivity increase and from the reallocation of police resources to more productive activities.

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