Cannabis Regulation and the Controlled Substances Act

A Law and Economics Perspective

Abstract

This paper examines cannabis regulation through the lens of law and economics, with particular attention to the dissonance between federal prohibition under The Controlled Substances Act (CSA) and widespread state legalization. Despite nearly fifty years of categorical federal prohibition, more than two-thirds of U.S. states have legalized cannabis for medical or recreational purposes. This fragmented legal environment has created market inefficiencies, generated equity concerns, and sustained illicit markets. Drawing on behavioral economics, this analysis explains why deterrence-based enforcement fails to suppress demand: present bias, shifting social norms, and optimism bias drive consumption regardless of legal penalties. Classical economic analysis reveals market failures, including information asymmetry, negative externalities, and distorted incentives caused by federal tax and banking restrictions. At the macroeconomic level, legalization offers tax revenues and job creation; however, it imposes costs on public health and regulatory systems. The analysis evaluates potential pathways toward a harmonized federal-state framework that would include rescheduling cannabis, calibrating taxation and licensing to displace illicit markets, and incorporating behavioral regulatory tools; such as potency labeling and advertising restrictions. Additionally, equity-focused reforms, including expungement and community reinvestment, are analyzed as mechanisms to address disproportionate harms of prohibition. These assessments are presented based on empirical research and economic analysis rather than political advocacy, aiming to highlight potential policy structures that improve efficiency, equity, and legal coherence.