Trade-offs are central to the cannabis policy debate. Prohibition and strict regulation may help reduce the physical, mental and social harms of cannabis consumption, but at the cost of increasing the harms from illegal markets and reducing consumption benefits. An economic model clarifies how these costs and benefits relate to policy and connects them to observable prices and tax-levels given the assumptions of the analysis. These model- based arguments are related to the ongoing academic policy debate. While some arguments from this literature modify the interpretation of the model (e.g., due to dependence, cognitive biases and market structure), the literature often fails to appropriately account for the magnitude of the policy costs and benefits identified. Taking various caveats into account, the framework indicates that a strict regulation would likely be preferable to prohibition given current estimates of excess harms (externalities and internalities) from cannabis use. While cannabis prohibition appears difficult to justify within an economic regulatory framework, risks from industry influence, policy ratchet effects, and human “decision-making flaws” speak to the need for caution and strong regulation when implementing legal regimes.
An economic model of regulation in the presence of illegal side markets supports the claim that a legal, regulated market would likely be preferable to a policy of prohibition, evaluated under cost-benefit criteria commonly used in other policy domains. Illegal supply costs are substantial, externalities are moderate, medical harms low. While there are issues of dependence, these are less serious than for alcohol and cigarettes. Note that this relative judgment can lead us to be influenced by status quo bias: It may be that the appropriate solution is that all three substances should be prohibited. On the other hand, the relative judgment helps guard against the use of stricter standards for cannabis than for “our” drug. Finally, while the model helps assess common justifications for prohibition, it is too crude to address questions relating to the design and regulatory principles of a legal market.
The model focuses on the trade-offs between consumption benefits, illegal market costs and use-related harms (internalities and externalities). While each of these categories have been addressed by others, I have argued that consumption benefits and the harms of illegal markets are likely higher than typically assumed, while the policy implications of internalities are more subtle than commonly acknowledged – increasing illegal market costs as well as reducing user harms, and speaking to the need for “behavioral” policies over a blanket prohibition. On the other hand, this discussion also suggests that recent economic theory may point towards similar types of “middle ground” legal systems as those suggested by researchers from other fields.
While this is assuredly not the final word on the issue, the analysis is an attempt to assess prohibition as a policy within the kind of framework underlying cost-benefit thinking used in policy analyses generally. Perhaps the main point from this perspective is the importance of externalities and illegal markets for assessing a prohibition: While externalities are surely present for cannabis as for alcohol use, the level of externalities identified for cannabis use appears too low to justify a policy that criminalizes all users and establishes a large, unregulated criminal system that recruits from the same population we aim to protect.