Legalized marijuana = Lower sales of beer, higher sales of chips

As the debate over recreational marijuana legalization blazes up in Minnesota, we are fortunate to be able to look at the experience of other states for some idea of likely consequences.

As The Economist noted recently,

Since the mid-1990s, more than 30 states have authorised marijuana for medical purposes and 11 have legalised it for recreational use. Because these laws were enacted at different times and in different places, they created a natural experiment for researchers to study the effects of marijuana—including its effect on food consumption.

Citing a study from economists Michele Baggio and Alberto Chong titled ‘Recreational Marijuana Laws and Junk Food Consumption: Evidence Using Border Analysis and Retail Sales Data‘, The Economist notes that

…Messrs Baggio and Chong collected monthly sales data from supermarkets, drug stores and other retailers in more than 2,000 counties across 48 states covering the period from 2006 to 2016. By comparing sales figures from neighbouring counties located along state borders—some where marijuana was legal and some where it was not—the authors were able to estimate the effect of marijuana legalisation on junk-food sales.

They found that after recreational marijuana was legalised in Colorado, Oregon and Washington, the only states for which 18 months of sales data were available, sales of ice cream rose by 3.1%, sales of cookies increased by 4.1% and sales of crisps jumped by 5.3% in the years after the laws were passed (see chart).

Referring to another paper by Baggio, Chong, and Sungoh Kwon titled ‘Marijuana and Alcohol Evidence Using Border Analysis and Retail Sales Data‘, The Economist reports that

…legalising medical marijuana reduced alcohol sales by more than 12%. This “substitution effect” was larger than previously thought and lasted for up to two years after legalisation (see chart).

Now the economics…

These papers illustrate a couple of basic economic concepts.

First, marijuana and ice cream, cookies, and potato chips are ‘complementary goods‘. As my old undergrad textbook describes them, these are

A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall. 

Marijuana consumption goes hand in hand with the consumption of things like potato chips. Bread and butter are the classic examples.

Second, marijuana and beer are what is known as ‘substitute goods‘. From my old textbook again, these are

A pair of goods that are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises. 

Marijuana and beer tend not to be consumed together but instead of each other. Here, butter and margarine are the classic examples.

Much of economics is about thinking through the consequences of actions. A consequence of hiking the minimum wage is employers buying less labor. A consequence of imposing rent controls is that less housing is supplied. You may think these consequences – costs – are outweighed by some offsetting benefit, but you do have to be realistic about their existence. And the vast majority of the consequences of any action are unintended. Nobody ever legalized marijuana in an effort to boost sales of potato chips, but that is what happens.

Many people have tried to define economics. Perhaps one definition might be the identification and comparison of the costs and benefits of all consequences, intended or otherwise, of a given action. Not very pithy, I’ll grant you.

John Phelan is an economist at the Center of the American Experiment.