10/28/2014 06:00 pm ET Updated Dec 28, 2014

Rethinking Marijuana's Regulation

Marijuana's legalization has previously been considered in terms of two propositions. Stop arresting people for its use and replace it's criminal prohibition with a legal regulatory system. The creation of a regulatory framework for legal marijuana, though, is not only a new challenge, but one fraught with many of the misconceptions that have beleaguered efforts to prevent marijuana use through the use of criminal penalties.

Marijuana's regulation as a legal commodity should not be used as a new tool to accomplish the objectives of the policies of its prior prohibition, nor should it be based on the same false premise that individuals lack the ability to make responsible decisions about its use and sale. These misconceptions, though, provide powerful rationales for government to exploit marijuana as a revenue source, substituting taxation for law enforcement as the necessary mechanism for the suppression of use as the object of public policy.

The idea that high prices for marijuana discourage use is one of the current arguments used by opponents of legalization, who argue that legalization will increase use by lowering prices. Interestingly, they do not address the corollary to this argument that it justifies outsourcing public policy objectives to both foreign and domestic criminal activity. Also of interest is that some advocates of legalization also believe that high prices, by way of excessive taxation, are required in a legal market to limit use.

Substituting taxation for inflated criminal profits to attain the same objectives, though, is misguided and counterproductive. This is especially relevant because it is the high price of marijuana that is one of the primary sources of the very problem marijuana's legalization seeks to address. Consider the following three considerations overlooked by conventional commentary on prospective marijuana regulation.

First, it must be noted that marijuana is a less dangerous and less addictive substance than alcohol or tobacco and should not be subject to greater taxes than either of these other drugs.

Second, given its relatively low production costs high retail prices for marijuana encourage illicit sales. According to the National Survey on Drug Use and Health more than 4.7 million sold illegal drugs in 2012, and presumably most of them sold marijuana, the nation's most popular illegal drug. This includes 680,000 teenagers, which represent 20% of the marijuana users in this age group.

Third, the government has utterly failed to control the production of marijuana through the use of criminal sanctions and law enforcement. The only way legalization will replace the current illegal market is through voluntary participation, and this works by way of market forces. Lower prices reduce the incentive for operating outside the regulated market.

But what about the threat of "Big Marijuana" in which giant corporations work hard to increase their profits by promoting marijuana use? The comparison here is to the tobacco industry, but it should be noted that a) tobacco is a much more addictive drug than marijuana, b) the tobacco industry is an oligopoly consisting of about a half a dozen companies, and c) tobacco cigarettes are a manufactured product reliant on a number of additives to make it appealing to consumers. The best counter-weight to having a small number of firms dominate the marijuana business is to create an open competitive market that fosters the economic viability of a multitude of participants.

One facet of an open competitive market is to allow personal cultivation, which is opposed by those in favor of high taxes. They argue that it would be hard to monitor and enforce taxation policies on small-scale transfers. However, as argued above, lower prices reduce the profitability of marijuana sales and thus the incentive for the sale of homegrown marijuana.

Regulation is intended to advance public policy objectives, and helping to mitigate drug abuse is a valid concern. Enforcing age restrictions on purchases and promoting social responsibility in advertising and marketing are important components of any regulatory framework. But a common misconception in discussion of marijuana's regulation is that use and abuse are the same. Discouraging consumption through high prices does not necessarily address either, as those most likely to abuse the drug will do what many do now - sell the drug illicitly to subsidize their own consumption. While regulation has an important role to play in reducing the abuse of alcohol, tobacco, and marijuana the most effective tools for these public policy objectives remain education and prevention programs.

The primary reasons Americans are beginning to support marijuana's legalization concern recognition that marijuana is not sufficiently dangerous to justify criminal sanctions and that prohibition has failed to adequately limit teenage access to it. In a more general sense these lessons are expressed in terms of recognition that the costs of prohibition outweigh its benefits. The primary social costs of prohibition derive from the existence of an unregulated market that thrives on artificially high prices, evades taxation, and sells to minors. The purpose of regulations for a legal marijuana market should be the reduction of social costs, and not, as is so tempting in this context, increasing public revenues.

Age limits, restrictions on marketing, and reasonable taxation all advance public interests with respect to the regulation of marijuana. So do free market principles regarding market access, competition, and consumer responsibility. Marijuana's regulation in a legal market should be based on pragmatic consideration of the public interest rather than a revival of the misconceptions of the very policy it is intended to replace.