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"Also, without the significant legal risks the margin reduction would be balanced off by the fact that there would be a much lower risk premium in all other aspects of production"
The "lower risk premium" would encourage more entities to get into production/distribution. The lower security costs and increased competition would be reflected in lower prices at the consumer level. For overall revenues and profit margins to stay at present levels the market would have to greatly expand.
I don't think that would happen to any great extent. I think people that smoke pot do now, regardless of legality or cost. It's just a personal decision, predicated on many factors...cost and legality being fairly irrelevant, (this is one reason why the "drug war" has failed). Admittedly, I have no solid research or evidence to back this assertion up....just personal life experience in all aspects of the drug culture, as user, grower, dealer and now straight.
End game...you would have more distributors/producers selling to same market level for reduced prices. Basically a race to the bottom. More people splitting up a smaller revenue pie. This would not help the economies of the countries that depend on this revenue.
In a sense, keeping it illegal is a way of nationalizing the industry and keeping the revenues artificially high, where they do not have to be affected by the normal market forces of a "legit" enterprise.
Mind you, I'm not arguing that it should be kept illegal. I would like to see it at least decrimalized or legalized entirely. I just don't believe that will happen because it would hurt a lot of powerful people economically (i.e. the World Bank). There is less chance of this happening than our gov't giving up on farm subsidies, and we know that isn't going to happen...despite the harm it does create in other parts of the world.
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