Cannabis Regulation and Social Welfare: Why Do Most Countries Fail in Their Implementation?

Cannabis legalization and regulation remain one of the most debated issues in modern society. This is mainly because these issues influence social welfare across different countries and regions. This article explores why legalizing cannabis does not always lead to higher social welfare, especially when legalizing it does not fully stop illegal market operations. The analysis focuses mainly on three regulatory situations: complete prohibition, well-regulated legalization with no competition from the illegal market and poorly implemented regulation where the illegal and legal markets coexist. Evidence from the literature and theoretical models suggests that the best societal welfare outcomes occur when governments apply appropriate Pigouvian taxes. This ensures that cannabis users bear the social costs associated with consumption. In theory, this type of regulation improves social welfare by reducing negative externalities. These expected benefits are not always achieved, or rather are weakened, by the continued existence of the illicit markets. Two of the major factors that contribute to the continued existence of these markets are high taxes and strict regulations. These factors usually encourage consumers to buy from untaxed illegal markets, allowing them to remain operational and competitive. As a result, the government incurs higher enforcement costs, economic inefficiencies and reduced social welfare. The findings also show that while regulation can improve social welfare and safety, its success depends on how well it is executed and implemented. Overall, this research sheds light on the dynamics of supply and demand in regulated and unregulated markets, and the complex social welfare considerations that governments must take into account in regulating the cannabis market effectively.