Abstract
The increasing popularity of marijuana has led to a recent public debate in the U.S. over its legal status. An open question remains about how the price of marijuana will change if it becomes legal. We assemble a unique dataset of marijuana prices to measure the effect of legalization. We use a difference-in-differences model to estimate this effect in the states of Colorado and Washington. Our model includes several explanatory variables such as state median income, whether a state had a medical marijuana law, and demographic characteristics to control for state heterogeneity. In addition, we control for other macroeconomic factors. In all 3 versions of our model, we find a negative effect in Colorado and a positive effect in Washington with varying levels of significance. The most significant results imply that the inflation-adjusted price of marijuana in Colorado decreased by about 8.8% after legalization while prices in Washington rose by 6.1%. We believe differences in each state’s policies explain our results.
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