As More States Legalize Marijuana, Economics Comes Into Play

The Federal Reserve Bank of St. Louis takes a look at Cannabis Legalization


  • More states are legalizing marijuana for medical or recreational use, and this movement has created a patchwork of laws and policies on how the drug is treated.
  • Among the states that allow the medical use of marijuana, laws can vary greatly in terms of the medical conditions that can be treated by the drug.
  • Policymakers face complex decisions on how to regulate marijuana. For example, the goal of maximizing revenue may conflict with the goal of reducing recreational use.

The topic of marijuana (cannabis) legalization moved into headlines following Colorado’s and Washington’s decisions to permit recreational use of the drug in 2012. Yet, these changes reflect nearly 50 years of evolution in drug policy.1

The relaxation of state laws on the possession and use of marijuana can be traced back to 1973, when Oregon became the first state to decriminalize the possession of modest quantities of marijuana, with a maximum penalty of a $100 fine. Then, in 1996, California approved marijuana usage for medical purposes. As of January 2020, about half of the states and numerous local jurisdictions have decriminalized possession to varying degrees, and 33 states currently have policies that allow patients to use marijuana if they qualify based on their medical diagnosis.2

Data for recreational-use states do indicate growth in legal sales and use. For example, in Colorado, monthly recreational sales were between $10 million and $20 million in early 2012; these sales have stabilized to around $90 million per month in 2018, or around $1 billion per year (just under $200 per person per year).3 Reported marijuana usage by adults in Colorado rose from 10.4% in 2011-12 to 18.1% by 2017-18.4

Notable increases in usage after legalization are also evident in Washington and Oregon; in fact, Oregon had the second highest usage rate in the country in 2017-18, with 20% of adults using marijuana at least one time in the past month. In contrast, national usage has been only slowly increasing, up from 7.1% in 2011-12 to 9.8% in 2017-18. Longer-term trends indicate that daily marijuana use by all adults has remained relatively stable and at low levels since 2000; some subgroupings put daily rates at below 3%.

A Closer Look at the Eighth District States

Marijuana is treated differently among the seven states that are part of the Eighth Federal Reserve District:5

  • Three states (Illinois, Missouri and Mississippi) have decriminalized personal possession of marijuana to some degree.
  • Three states (Arkansas, Illinois and Missouri) currently have or will have medical marijuana programs in 2020.
  • Illinois has allowed sales of marijuana for recreational use.
  • Three states (Indiana, Kentucky and Tennessee) continue to criminalize all possession of marijuana.

Adult marijuana use across these seven states is near or below the national average, with 2016-17 estimates ranging from 7.9% in Kentucky to 9.6% in Indiana.

On Jan. 1, 2020, Illinois became the first state in the Eighth District to allow the sale of marijuana for recreational use. January sales reached just under $41 million. Assuming no growth in sales, annually this is $480 million, or about $12 per capita. The Colorado experience suggests sales are likely to exceed this amount, assuming adequate supply.

The year 2020 also marked the addition of Missouri as a state allowing sales of medical marijuana. The table below summarizes key statistics of the medical markets in the three District states that allow these sales; it provides a snapshot of the supply and demand in the market in each respective state. Assuming similar demographics and medical needs in these states, varying state policies explain the different outcomes.

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