AN ECONOMIC ANALYSIS OF MEDICAL CANNABIS MARKET

Introduction

The purpose of this assignment is to analyse the economic impact the changes in medical cannabis market as outlined in given article. Recently the government of Australia has legalize the cultivation of medicinal cannabis to supply domestic patients.  This essay identifies the effect on the market forces by studying the changes made in Australian cannabis market. Then, these impacts were illustrated using demand and supply curves assuming other factors remain constant. The demand elasticity and the revenue impact is analysed by for cannabis medicine assuming it is an essential product. Finally, the externalities from these recent changes to the market have been analysed.

Demand and supply analysis

Australian market for cannabis alternatively called as marijuana can broadly be defined as medical cannabis market where cannabis are used as a treatment for chronic and seriously ill patients and recreational cannabis market where cannabis are traded in illegally as an illicit drug. The article discusses the market for medical cannabis in Australia in a narrow view point.

The market supply is mostly represented by imported cannabis where the supply of the cannabis is inelastic due to the fact that the medicine is not readily available in the market and it must be imported with strict regulations. On the other hand the demand for the medicine is also inelastic since it is an essential good for the patients.

With the new legislation being passed for medical cannabis, we could observe effects on the market forces;

Supply - The government new legislation has allowed the domestic suppliers to grow cannabis after obtaining licenses from the government allowing more farmers to enter the medical cannabis market. On the other hand, international producers such as Israel, USA and Canada are now contemplating entering Australian market. Further it is now easier to import them to Australia. Both could result in an increase in supply while other factors remain constant. Reducing the time lag of importing the medicine will also make the product available in the market in very short time will cause the new supply to be more elastic, given the other factors remain constant. When the market supply increases as a result of new suppliers enter the market, the supply curve for medical cannabis shifts outwards (right) and has become more elastic, ceteris paribus. 

Demand - The recent harvest of first crop and its trial for the treatment of epilepsy can lead to an increase in demand if the test if successful. Currently, Australian patients purchase cannabis for epileptic patient in the black market paying a high price with low medical safety. If the government can prescribe cannabis for epilepsy, the demand for medical cannabis will be increased when the buys move from illegal marijuana market to medical cannabis market, ceteris paribus.

The combined effect of both demand and supply on the market where the new supply curve has become more elastic after the import of cannabis and making it easy to supply has made it readily available in the market than before. The new market price has decreased and the equilibrium quantity has increased. This shows that there will be more cannabis available for the patients at a lower price. The government action has benefitted the consumers who could now access the medicine at a lower price and high quality as the government regulates the product.

Externality analysis

The new legislation on medical cannabis could bring both positive and negative externalities.

When the medicine is readily available for the patients, the entire society will benefited by having a healthy nation. Allowing the manufactures to grow cannabis in Australia, there will be more job opportunities created. Also, in future the import of the medicine will be saving foreign currency from flowing out of the country, improving the foreign exchange. All these positive externalities could be enjoyed by the nation as whole.

In contrast, by allowing the producers to grow cannabis in Australia, the forests could be subject to deforestation. This could badly affect the environment. In the social aspect it could be argued that allowing producers to grow cannabis as a medical product could soon be gone to the marijuana drug addicts. “In 2013, it was estimated that about 6.6 million (or 35%) people aged 14 or older had used cannabis in their lifetime and about 1.9 million (or 10.2%) had used cannabis in the previous 12 months” (Claughton, 2013, pg 58). This means that there will be a possibility that the medical will be used as an illicit drug when it is readily available.

In order to mitigate the negative externalities, the government could introduce strict regulations to monitor the production, distribution and use of cannabis.

Conclusion

It could be concluded that the recent Australian government legislation allowing medical cannabis to produce domestically has impacted both demand and supply. The demand for the medical cannabis could be increased as a result of new research carried out by the government to treat for epilepsy and shifting buyers from illegal cannabis market to regulated cannabis market. Also, the supply too has increased due to the local production and short term import of cannabis. This would ultimately resulted in the market price of medical cannabis to fall while the quantity to be increased. On the other hand, an increase in the price of cannabis could resulted in an increase in the producers’ revenue vice versa, since the cannabis could be assumed as an essential product for the patients with no close substitutes. Finally this change in legislation could result in both positive and negative externalities, where negative externalities could be overcome by close supervision by the government.

List of References

Abel, A.B., Bernanke, B.S. and Croushore, D. (2011). Macroeconomics, (7 Ed), Prentice Hall.

Claughton, D. (2017). Interest in growing medicinal cannabis is strong. [online] ABC Rural. Available at: http://www.abc.net.au/news/rural/2017-02-22/medicinal-cannabis-new-agricultural-opportunity/8287346 [Accessed 28 Apr. 2017].

Gans, J.; Kings, S.; Stonecash, R.; Byford, M.; Libich, J. and Mankiw, N. G. (2015). Principles of Economics, (6 Ed), Australia, South Melbourne: Cengage Learning Pty Limited.

McTaggart, D., Findlay, C. and Parkin, M. (2010). Microeconomics, (6 Ed), Frenchs Forest, NSW, Australia: Pearson.

National Drug Strategy Household Survey detailed report (2013). National Drug Strategy Household Survey detailed report. The Australian Institute of Health and Welfare.

Webarchive.nla.gov.au. (2017). NLA Australian Government Web Archive. [online] Available at: http://webarchive.nla.gov.au/gov/20110309153909/http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/Publishing.nsf/content/mono57 [Accessed 28 Apr. 2017].