Marijuana on Main Streets? The Story Continues in Colombia: An Endogenous Three-part Model

TL;DR

This paper develops an endogenous three-part model to analyze marijuana demand in Colombia, considering access restrictions and potential effects of legalization, revealing inelastic demand and demographic factors influencing usage.

Contribution

It introduces a novel endogenous three-part model accounting for access, intensive, and extensive margins, highlighting the importance of selection into access for demand estimation.

Findings

Marijuana demand is inelastic with an elasticity of -0.45.

Legalization could increase usage probability by 3.8 percentage points.

Estimated annual tax revenues range from USD 11 million to USD 54.2 million.

Abstract

Cannabis is the most common illicit drug, and understanding its demand is relevant to analyze the potential implications of its legalization. This paper proposes an endogenous three-part model taking into account incidental truncation and access restrictions to study demand for marijuana in Colombia, and analyze the potential effects of its legalization. Our application suggests that modeling simultaneously access, intensive and extensive margin is relevant, and that selection into access is important for the intensive margin. We find that younger men that have consumed alcohol and cigarettes, living in a neighborhood with drug suppliers, and friends that consume marijuana face higher probability of having access and using this drug. In addition, we find that marijuana is an inelastic good (-0.45 elasticity). Our results are robust to different specifications and definitions. If marijuana were legalized, younger individuals with a medium or low risk perception about marijuana use would increase the probability of use in 3.8 percentage points, from 13.6% to 17.4%. Overall, legalization would increase the probability of consumption in 0.7 p.p. (2.3% to 3.0%). Different price settings suggest that annual tax revenues fluctuate between USD 11.0 million and USD 54.2 million, a potential benchmark is USD 32 million.