Caulkins et al. astutely identify the major policy challenges confronting cannabis legalization, in particular the likelihood of dramatic price declines, the concomitant risk of increased consumption and abuse, and the difficulty of preventing diversion to the black market if significant taxes or other restrictions are imposed .
The authors' prediction of dramatic cost reductions is confirmed by current experience in Israel, where medical cannabis gardens have been established under the supervision of the Health Ministry. The Israeli program produces high-grade medical cannabis outdoors at a cost of $.79/g ($22 per ounce), and sells it for up to $1.58/g ($44/oz) [Mimi Peleg, personal communication]. This is equivalent to the authors' price estimate for indoor grow houses, and almost an order of magnitude lower than prevailing prices on the gray market in California.
A different perspective is provided by the state-approved medical cannabis system in the Netherlands, where pharmacy-grade cannabis is grown indoors by Bedrocan BV under tightly regulated conditions and distributed through the Dutch Ministry of Health. Bedrocan's cannabis is currently sold at a price of €42.5/5 g (= $11.60/g, comparable to the price on the illicit market [Tjalling Erkelens, personal communication]. The high price of Bedrocan's product is not due to taxes, but to the highly exacting pharmaceutical-grade production and testing conditions required by the Dutch government. Despite the high price, black market competition is not a problem, because cannabis is readily available at lower prices in coffee houses.
Regulation should therefore be considered alongside taxation as a tool for maintaining prices. In addition to raising the costs of production, regulation raises prices through licensing fees that are passed on to consumers.
An instructive historical example of successful regulation can be seen in the case of India, where cannabis was legally taxed and regulated in many states until recent decades. The Indian system was described in detail by the British Indian Hemp Drugs Commission report of 1893–94, which still stands today as the most thorough and exhaustive examination of cannabis regulation, albeit from a century ago. The commission examined the gamut of state regulatory systems in India with an eye on how to maximize tax revenues. State regimes ranged from complete prohibition to near laissez-faire, but typically involved some form of regulation, licensing or taxation.
The Commission singled out Bengal as having the most successful regulatory regime. In Bengal, the state licensed production and sales and imposed both a duty and licensing fees. In 1892–93 the excise tax came to 2.9 rupees per pound, while license fees added 2.5 rupees more, accounting for about half the total retail price . Hemp–drug taxation was an important source of state revenues in Bengal, constituting 21% of excise revenues. The Commission concluded that a ‘combination of a fixed duty with license fees for the privilege of vend constitutes the best system of taxation for the hemp drugs’.
The Hemp Drugs Commission report provides useful insight into the economics of a legal cannabis market. Depending on the region and quality, the retail price of ganja in India ranged from 3/8 to 20 rupees per pound in 1893 , when a rupee was worth about $0.30. In today's dollars, this translates to between $2.75 and $150 per pound, consistent with the authors' low-ball cost estimates. Modern costs would probably be higher due to more advanced production techniques. The cost of a regular habit was estimated at one to six pice per day, a pice (1/64 rupee) being the smallest coin in circulation .
Despite the low cost of hemp drugs, the Commission observed only modest rates of consumption in India. Regular users constituted ≤ 1% of the population in every region except Calcutta, where they numbered 5.4% .
It is noteworthy that Bengal and other states prohibited private cultivation and limited possession in order to prevent illicit diversion. Therefore legalization did not eliminate cannabis-related crime: in 1892–93, Bengal reported 407 arrests for ganja offenses .
The historical example of India proves the viability of legal cannabis regulation. However, it does not provide final answers to the questions raised by Caulkins et al. which must be re-addressed in the context of modern American culture.