Marijuana Demand: An Instrumental Variable Approach

Abstract

This paper uses crowd-sourced transaction data from a cross-section of the US to examine demand for marijuana. State and regional variations in consumption, price and quality are explored. Marijuana tends to be cheapest and of the highest quality in the west. The responsiveness of the demand for marijuana to changes in its price is estimated. The analysis accounts for the possibility that marijuana demand is endogenous by utilizing an instrumental variable technique. Findings are consistent with previous research and suggest that the own-price elasticity of demand for marijuana is inelastic and approximately -0.6. Estimates also point to the conclusion that contrary to recent literature beer is a substitute for marijuana, not a complement. Investigation of the inverse demand curve indicates that as one might expect, and also in accordance with past literature, there exist price discounts for increased quantities, decreased risk and diminishing quality.