An Economic Perspective on the Legalisation Debate: The Dutch Case

Abstract

This paper reviews how economic modelling provides a deeper understanding of drug markets. The exercise focuses on ‘soft drugs’ (cannabinoids) in the Netherlands and outlines the effects of prohibition and legalisation. The purpose is to present an overview of analytical tools to non-economists. Based on a basic supply and demand framework the impact of enforcement, externalities, producer incentives and demand elasticity are highlighted. Results indicate that social welfare is maximized under legalisation given limited externalities associated with consumption and price inelastic demand. We recommend a liberalized soft drugs market that requires inter alia taxation, complemented with various health measures like quality controls and public campaigns. The Dutch case is exemplary, as this economic perspective offers universal building blocks relevant to the legalisation debate in other countries, and potentially to other substances