Weeding out the dealers? The economics of cannabis legalization.

We model consumer choices for recreational cannabis in a risky environment and its supply under prohibition and legalization. While legalization reduces the profits of illegal providers, it increases cannabis consumption. This trade-off can be overcome by combining legalization with sanctions against the black market, and improvements to the quality of legal products. Numerical calibrations highlight how a policy mix can control the increase in cannabis consumption and throttle the illegal market. In the US, the eviction prices we predict to drive dealers out of business are much lower than the prices of legal cannabis in most of the states that opted for legalization, leaving room for the black market to flourish. Analyzing the compatibility of several policy goals sheds light on the less favorable outcomes of recent legalization reforms and suggests a new way forward. • Legalizing cannabis can reduce illegal providers' profits but increases consumption. • A policy-mix legalizing high-quality cannabis while enforcing sanctions against the black market overcomes this trade-off. • This policy-mix is compatible with a large set of government objectives. • These include maximizing consumer surplus as well as minimizing enforcement costs and negative externalities of illegal use. • Maximizing tax revenue is likely to leave room for illegal providers to operate. [ABSTRACT FROM AUTHOR]