Answer to Question #193649 in Macroeconomics for Kaner

Question

1.Using the concepts of demand and supply, explain why cannabis prices declined sharply by 70% in Colorado between 2014 and 2018. Use a diagram of the cannabis market to illustrate your point.

2.With the help of a numerical example, explain why California and Maine tax cannabis by weight rather than by price.

3.Using the concept of substitutes and complements, explain with the help of a diagram how legalising cannabis may possibly affect the sales of alcohol and cigarettes. When the State government evaluates the effect of legalising cannabis on tax revenue, should it look only at the sales of cannabis? Or, should it also consider the changes in the sales of alcohol and cigarettes?

Answer 1

(1)

Cannabis was legalized in most of the aspects during 2014 and 2018. This implied that the suppliers were able to sell or supply it at much lower cost as compared to when cannabis was illegal where it required higher efforts and cost to supply it was more. Given the demand and supply, if the supply of a good increases, the price would reduce, keeping the demand constant.

The supply curve shifted to S' that is, rightwards when the supply increased. This would reduce the price and the new price would be P. Also the equilibrium quantity would increase to Q, taking the new equilibrium at E.

(2)

The reason behind California and Maine tax cannabis by weight rather than by price is the instability in the prices. With the changing market condition being a dynamic market, the price of cannabis isn't stable and that brings out the reason to tax this by weight as the weight ensures a stable tax to be charged.

Consider an example, if it is taxed on the price, say price now is $10 and the tax on this price is 10% which is $1 but with change in price say, price decreased to $5 therefore, the tax on this being 10% would be reduced to $0.5, which shows the instability. But when it is taxed on weight, say the tax rate in California in 2016 was $1.35/oz. for cannabis plants, even if the price changes, people have to pay taxes for every ounce they purchase with a tax of $1.35/oz., which shows the stability.

(3)

The cannabis can be substitute of alcohol and cigarettes. So, as the cannabis sales increase, this will lead to decrease in the sales of the alcohol and cigarettes. So, when government evaluates the effects of legalizing cannabis will lead to an increase the tax revenue and it will affect the revenues negatively. So, cannabis price increase this will lead to increase the sales of alcohol and cigarettes.