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Unit 5: Consumer Behaviour: Cardinal Approach

Stephen T. Easton argues that if marijuana was legalized, we could transfer these excess Notes

profits caused by the risk-premium from these grow operations to the government:
If we substitute a tax on marijuana cigarettes equal to the difference between the local
production cost and the street price people currently pay – that is, transfer the revenue
from the current producers and marketers (many of whom work with organized crime)
to the government, leaving all other marketing and transportation issues aside we would
have revenue of (say) $7 per [unit]. If you could collect on every cigarette and ignore the
transportation, marketing, and advertising costs, this comes to over $2 billions on Canadian
sales and substantially more from an export tax, and you forego the costs of enforcement
and deploy your policing assets elsewhere.
One interesting thing to note from such a scheme is that the street price of marijuana
stays exactly the same, so the quantity demanded should remain the same as the price is
unchanged. However, it’s quite likely that the demand for marijuana would change from
legalization. We saw that there was a risk in selling marijuana, but since drug laws often
target both the buyer and the seller, there is also a risk (albeit smaller) to the consumer
interested in buying marijuana. Legalization would eliminate this risk, causing the demand
to rise. This is a mixed bag from a public policy standpoint: Increased marijuana use can
have ill effects on the health of the population but the increased sales bring in more revenue
for the government. However, if legalized, governments can control how much marijuana
is consumed by increasing or decreasing the taxes on the product. There is a limit to this,
however, as setting taxes too high will cause marijuana growers to sell on the black market
to avoid excessive taxation.
When considering legalizing marijuana, there are many economic, health, and social issues
we must analyze. One economic study will not be the basis of Canada’s public policy
decisions, but Easton’s research does conclusively show that there are economic benefi ts in

the legalization of marijuana. With governments scrambling to find new sources of revenue
to pay for important social objectives such as health care and education expect to see the
idea raised in Parliament sooner rather than later.
5.5 Summary

Utility is an abstract concept rather than a concrete, observable quantity. The units to which
we assign an “amount” of utility, therefore, are arbitrary, representing a relative value.

Total utility is the aggregate sum of satisfaction or benefit that an individual gains from
consuming a given amount of goods or services in an economy.
The amount of a person’s total utility corresponds to the person’s level of consumption.
Usually, the more the person consumes, the larger his or her total utility will be.

Marginal utility means the utility derived by consuming every next unit of same thing.
According to the law of diminishing marginal utility when a person consumes more
and more units of a good his total utility increases while the extra utility derived from
consuming successive units of the good diminishes.
Law of Equi-marginal Utility or the principle of Equi-marginal utility says that the consumer
would maximise his utility if he allocates his expenditure on various goods he consumes
such that the utility of the last rupee spent on each good is equal.

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