Last year, Scioto Analysis published a cost-benefit analysis on Ohio’s recreational marijuana ballot initiative. One of the benefits we calculated was the consumer surplus that recreational marijuana users would receive in the marketplace.
An individual’s consumer surplus is the difference between the price that they would be willing to pay for a good and the price that the good actually costs in the market. The total consumer surplus for a market is the sum of all individual consumer surpluses. Calculating consumer surplus lets us estimate how much value people are getting from a good defined by their own valuation of the good.
One of the challenges with using consumer surplus as a benefit is that we can’t say that the entirety of the legal market's consumer surplus is the benefit added from legalizing recreational marijuana, because there already was a black market that generated some consumer surplus.
To come to an accurate estimate of consumer surplus, we should be measuring the change in consumer surplus that results from legalizing recreational marijuana. The challenge with this is that we don’t know what the illegal market for recreational marijuana looks like.
That is the topic of a new working paper published by the National Bureau of Economic Research. The economists who authored the paper are concerned with measuring the market for menthol cigarettes under a hypothetical ban. Menthol cigarettes have become a topic of focus since the FDA first proposed a rule to prohibit them in 2022.
These researchers used data from a discrete choice experiment where smokers were asked about what products they would use under certain menthol-ban scenarios. Respondents were given four product choices, non-menthol and menthol cigarettes and e-cigarettes, and the option to say they would quit smoking. The scenarios they were presented with varied on the prices of those products and their legality.
For example, one subject might be presented with the scenario of a full ban, but prices for menthol cigarettes remain low and as a result, they might continue to purchase and use menthol cigarettes illegally.
The result of this discrete choice experiment is a mixed logit model that allows the researchers to understand how a menthol cigarette ban might affect people’s decision to continue to smoke. The researchers found that if menthol cigarettes are banned but menthol e-cigarettes are not, then the demand-side for an illegal menthol cigarette market would be between 59% and 92% the size of the current market. If both menthol cigarettes and e-cigarettes are banned, then the demand-side of the menthol cigarette market would be between 69% and 100% the size of the current market.
Although this result suggests that there would still be a robust demand for menthol cigarettes with a ban in place, the researchers also found that this ban would lead to smokers attempting to quit at a rate 14% - 28% higher than currently. The authors cap their paper off with a brief cost-benefit analysis that finds that because the demand remains quite high for menthol cigarettes, a ban would actually have higher costs than benefits. This is because not many smokers would quit, meaning the avoided externalities are quite small, and the people who continue to use the now illegal cigarettes are burdened by much higher prices.
One notable area this experiment is unable to address is the effect that banning menthol cigarettes might have on preventing new smokers, especially children, from ever entering the market. However, this framework for identifying the demand-side of a black market could prove extremely useful for future research on banned goods.