In the illegal market for marijuana, price includes direct and indirect costs of production. Direct costs include material, labour costs and other direct expenses. Indirect costs include the risk of arrest and imprisonment or personal harm (applicable to suppliers and demanders). These Indirect costs lead to a “compensatory markup� on the final price. The additional markup serves as compensation to the dealers and others along the supply chain[6], for the additional risk of doing business in the illegal market for marijuana. With the enactment of more favourable legislation and less severe penalties, regarding marijuana offences, it is expected that in response to the reduced risks indirect costs will fall, thus reducing the compensatory mark-up on marijuana price. The demand curve will also shift to the right since the market now includes most of the old users plus some new users. Moreover, the reduced risks will also lower direct costs, these changes will lead to a rightward shift in the supply curve. The eventual impact on the market will depend on the magnitude of the change in supply and demand. If the supply curve for marijuana is low enough and demand curve shifts only moderately, then legal marijuana will be cheaper than non-legal marijuana. Assuming comparable quality, non-legal suppliers will become non-competitive. Is expected that there will be a gradual shift from the illegal to the legal suppliers. See Figure B.
Figure B: Illegal vs legal Market for Marijuana
Table 1 shows the effects of the proposed legislative changes. As seen the effects can vary depending on the model implemented. Furthermore, a search of the literature revealed that different countries have applied different models of the liberalization of marijuana laws, each has had somewhat different outcomes with specific areas of impact being affected differently. These outcomes are summarized in Table 2 below
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