Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Wednesday, September 22, 2010

Beer Distibutors Lobby Against Legalization of Marijuana

Posted by Simon Halliday | Wednesday, September 22, 2010 | Category: , |

In a fantastic display of the power of availability of substitutes, we're witnessing the opposition to legalization of marijuana in California by California Beer and Beverage Distributors.  Proposition 19, which proposes the legalization of marijuana in California, has various groups lobbying against it.  The main group funding the opposition to the proposition is the California Police Chiefs Association.  That makes sense to me for political economy reasons (if I am a policeman, and I know that one of the sources of me having a job is drug crime, if drug possession is no longer a crime, then I am less likely to have a job in the future, therefore I campaign against the legalization of drugs to ensure myself a job), but not moral ones (marijuana doesn't have any 'worse' effects than alcohol, in fact it's less addictive, and legalizing marijuana would decrease certain drug-related crimes, which are often racially/ethnically correlated).

Anyway, the California Beer and Beverage Distributors face a similar problem economic problem.  If marijuana is legalized, then the the price of marijuana is likely to decrease because of increased (legal) supply.  Let's assume that marijuana is a substitute for beer. If the price of a substitute decreases, this implies that the good that has the higher price is going to take a hit to its demand - its demand decreases.  Consequently, at the same supply of beer, the price for beer will be lower than it was before the price for the substitute decreased.  At this new, lower price, some firms may exit the market because they cannot cover costs.  If firms exit the market, then the supply must decrease.  If the supply decreases, then there is less beer for beer distributors to distribute, that is, the demand for beer distribution decreases.  If the demand for beer distribution decreases, then at a given supply the price for beer distribution must decrease (a new, lower, equilibrium price obtains).  At this price some beer distributors may not be able to cover their costs.  Some of the distributors will have to exit the market.  Consequently, beer distributors will pay now to ensure that a proposition that jeopardises their future profitability does not get passed! Economics in action.

How might this all change if beer and marijuana were complements rather than substitutes? Well, in that case the opposite would hold.  Demand for beer would increase with legalization of marijuana (as consumption of marijuana increased, so would consumption of beer).  Consequently, there might be an increase in demand for beer distribution, which, at a given supply of beer distribution, would imply a higher price for beer distribution and greater profitability.

So it all rests on whether beer and marijuana are substitutes or complements.  It appears as though the beer distributors have a strong reason to believe that they are substitutes, else they wouldn't be paying to try to oppose the legalization of marijuana.  I think this is a fantastic, entertaining and easily teachable use of basic economics principles and price theory.  I've made a few simplifying assumptions along the way, but the explanation still helps us to understand the behaviour of the beer distributors.

Images sourced from from users ruskyskytrain and MindExpansi0n.

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