Referring to an article published on the 23rd October 2012, by Christine Legrand of the Guardian Weekly, the president of Uruguay plans to legalize marijuana. The sale, possession and transfer of this substance is currently illegal in Uruguay but the domestic black market for this good is valued at $75 mil, according to the minister. Roughly 8% of Uruguay's population consumes this drug occasionally.
What happens to the domestic economy when the drug is legalized?

Marijuana Leaf

Currently, the only way to obtain this drug is through the black market. A black market is an underground economy performed by criminals. According to the United Nations (UN) drug report 2012, the value of marijuana in Uruguay is USD 0.7 per gram during the year 2010. When the drug is legalized, the amount of supply will have a sudden rise because there are no penalties for its production, thus businessman who sees the great profit of this market will start to grow their own Cannabis.This will cause the price of marijuana to fall tremendously to the cost of production. The Uruguayan government will commence laws to make sure the production of this good is regulated to prevent the price to fall too low.

Demand and Supply Graph

When this drug is legalized, the demand of the good rises too because the risk of being prosecuted by the law is eliminated. Both the supply and demand curve will shift to the right, lowering the price equilibrium (as shown in the graph).

Personally I feel that the legalization of marijuana has huge economic benefits to Uruguay. The excess profit from this market can be transferred to the government instead of criminals and these profits can be used to improve social welfare. However, health issues will arise, but to be fair, marijuana is not as dangerous as tobacco and alcohol. Furthermore, the government has control over the consumption by increasing or decreasing tax. Of course there is a limit whereby if the tax is too high, black markets will still occur. My final opinion is that, if the government keeps a close eye to control production and price, legalizing marijuana shouldn't be a problem.

Reference:

http://www.guardian.co.uk/world/2012/oct/23/jose-mujica-uruguay-legalise-cannabis?newsfeed=true

Written by Kar San