Never forget consumer surplus.

Steven Landsburg is critical of co-blogger Scott Sumner’s proposal to give preference in licensing legal marijuana sellers to those who were previously convicted of marijuana offenses. Scott calls this “affirmative action for drug pushers.” Actually, though, his quote about the policy he favors does not mention drug dealers. (The word “pushers” is a misnomer; almost no one who sells drugs “pushes” them.)

Here’s the relevant passage that Scott quoted:

In Los Angeles, residents with past marijuana convictions will not only be allowed to buy licences to sell the drug, but will be given priority. Under the city’s “social-equity programme”, low-income Angelenos who have previous marijuana convictions or who have lived in areas with disproportionately high rates of arrest for marijuana offences will be given preference when licences to open marijuana retail businesses are granted. Oakland, San Francisco and Sacramento have introduced similar initiatives.

We can be sure that many of these convictions, possibly most, were for dealing or producing illegal marijuana. But I would bet that some of them were for simply using marijuana. And even some of the convictions for dealing might have been against users who were heavy users. The police and prosecutors tend to regard being caught with large amounts of marijuana as prima facie evidence that one is a dealer; sometimes, though, some of these people might simply have been stocking up.

All this is relevant for understanding where I’m going to go in responding to Steve. Here’s Steve’s criticism:

First, if you want to compensate people for past persecution, the right way to do it is with cash, not by misallocating productive resources. If there must be licenses, they should be allocated to those who can use them most efficiently, regardless of any past history.

Second, drug dealers have never been the primary victims of anti-drug laws. They can’t be, because there is free entry and exit from that industry. Anti-drug enforcement leads to exit, which in turn leads to higher profits for those who remain — and the exit continues until the profits are high enough to compensate for the risks. One way to think about this: All those “persecuted” drug dealers were, in effect, employing the government to stifle their competition, and paying a fair price for that privilege in the form of occasionally being convicted and punished themselves.

That’s an excellent critique.

Here’s where Steve goes off-track though. He continues:

The primary victims of anti-drug legislation are potential consumers who were deterred by artificially high prices. How do you compensate those victims? You can’t. In a population of 1000 people who have never used drugs, it’s quite impossible to identify the 200 or 300 or 400 who would have happily indulged if only the price had been lower.

No. No. No. Steve has put in finger on the category that contains the primary victims but has totally missed the primary victims within that category. The primary victims are consumers. But they are not potential consumers; they are actual consumers.

Think about a downward-sloping demand curve. Where are the potential consumers “who were deterred by artificially high prices?” They are further down the demand curve than the actual consumers who were not deterred. The loss in consumer surplus to the actual consumers is much higher than the loss in consumer surplus to those who were deterred.

And the loss is even greater to those actual consumers who were caught and fined or imprisoned. That’s where my earlier point comes in. Some of those people who Scott wants to give preference in licenses were consumers and so Steve’s second argument doesn’t apply to them. Overall, though, they are likely to be a small percent of those who were convicted, so Steve’s second argument applies to most of the people who, with Scott’s proposal, would get preference.

Bottom line: I agree broadly with Steve’s argument against Scott’s proposal but Steve has badly missed identifying “the biggest losers.”