Libertarians For Taxation

Despite the fact that he writes for one of the best-known libertarian publications, Reason, Nick Gillespie isn't afraid to admit that some new taxes would be better than the status quo: legalize and tax drugs, prostituion, and gambling, he says in the New York Times. (See my post on California's still-pending proposal to legalize and tax marijuana).

But, as Gillespie points out, there are bigger economic reasons to legalize black markets than just new tax revenue.

In terms of economic stimulation and growth, legalization would end black markets that generate huge amounts of what economists call “deadweight losses,” or activity that doesn’t contribute to increased productivity. Rather than spending precious time and resources avoiding the law (or, same thing, paying the law off), producers and consumers could more easily get on with business and the huge benefits of working and playing in plain sight.

What exactly is this "deadweight loss"? In the case of drug legalization, there is evidence that the black market draws in people who would otherwise be legitimate entrepreneurs.  The businesses that they did not create because they became drug dealers instead is one deadweight loss.

Could bans on prohibition have a similar effect? I haven't seen any research.  But some madams have shown an entrepreneurial flair that goes beyond illicit activities.