School of Social

Science and Public Policy

Department of Management

Under the Law

Models of Regulation for Cannabis Markets

MSc Public Policy and Management

Exam number: W085018
Supervisor: Professor Juan Baeza
Word count: 14938
London, 2 September 2016
 Insanity: doing the same thing
over and over again and expecting different results
Albert Einstein

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Acknowledgments

I would like to express my sincere gratitude to the Chevening Scholarships Programme,

funded by the Foreign and Commonwealth Office (FCO) and partner organisations,
which made this Masters possible. Thanks for giving me the opportunity to live this
fantastic experience in London, meeting bright students from all around the world. My
gratitude to my supervisor Prof. Juan Baeza, for his guidance. I am also grateful to to
Prof. Christel Koop, for her very valuable contribution and comments on this
dissertation. My sincere thanks also goes to fellow activists back home, in Sao Paulo,
for the inputs on this enticing debate on how to set a new drugs policy, more functional
and aware of human rights. I am also grateful to my family and my friends, who always
stood by me, putting trust in my capabilities and efforts.

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Abstract

This dissertation examines the policy process of regulating a new market after a
regulatory failure, like the current regime of prohibition. It examines the principles that
should guide the regulation setting and what should be the degree of state intervention
in newly legalised cannabis markets. This dissertation analyses the cases of Uruguay
and Colorado (US) to assess if there should be an optimum degree of regulation in the
cannabis industry. It categorised the current models of governance as state-led and
private-run. It examined the whole chain of cannabis, from production to retail, among
other aspects such as pricing and marketing, to propose a guiding model for the
regulation-design process, based on th​e Best Practise Regulation Model, from the New
Zealand government. It touches key questions regarding cannabis regulation, whether it
should mirror in the tobacco and alcohol industry or whether it should be under a
public-health perspective.

Keywords: ​cannabis, regulation, cannabis regulation, legalisation, drugs policy,

prohibitionism, war on drugs, uruguay, colorado

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Contents

Acknowledgments​​………………………………………………………………………..…… iii
Abstract​​…………………………………………………………………………………….…. iv
List of Tables …………………………………………………………………………….…… vii

1. Introduction - On the Debris of a Lost War ​………………………………………….. 1

1.1. The Subject of this Dissertation ………………………………………………….......... 2
1.2. Dissertation Structure …………………………………………………………………... 3
1.3. Literature Review ………………………………………………………………………... 4

2. The Current Regulation - Prohibitionism and Policy Failure ​…………………….. 7

2.1. The Drugs Problem …………………………………………………………………..…. 8
2.2. Regulation Failure ………………………………………………………………….…... 10
2.3. Drugs Policy Failure …………………………………………………………….……… 11
2.4. Stalemate ………………………………………………………………………………... 14

3. How to Regulate - Methodology and Theoretical Framework​ …………………... 16

3.1. Policy Process ………………………………………………………………………….. 16
3.2. The Concept of Regulation ………………………………………………………….… 17
3.3. Criteria for a ‘Good Regulation’ ……………………………………………………….. 18
3.4. Lessons from the Tobacco and Alcohol Regulation ………………………………… 20
3.5. Goals of the Cannabis Regulation ………………………………………………….… 21
3.6. Regulatory Design …………………………………………………………………….... 22

4. Uruguay and the US - Two Models of Governance ​……………………….………. 24

4.1. Models of Regulation ……………………………………………………………….….. 24
4.2. Uruguayan and American Models …………………………………………………..... 26
4.3. Public Sector versus Private Sector ………………………………………………….. 29

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4.4. Choices of Regulation ……………………………………………………….……….… 31

5. The Task of Regulation - Key Challenges​ …………………………………………. 33

5.1. Personal Production ……………………………………………………………...…… 36
5.2. Club Production ………………………………………………………………………… 37
5.3. Production for the Wholesale Market …………………………………………….….. 38
5.4. Product Control …………………………………………………………………………. 39
5.5. Supply …………………………………………………………………………………… 40
5.6. Vendor and Outlet …………………………………………………………………….... 41
5.7. Marketing ………………………………………………………………………………... 42
5.8. Harm Reduction ……………………………………………………………………...…. 43

6. Price and Taxation ​……………………………………………………………………... 44

6.1. Price …………………………………………………………………………………….. 44
6.2. Cannabis Price …………………………………………………………………………. 45
6.3. Taxation ……………………………………………………………………………….… 46
6.4. Models of Price Control ……………………………………………………………….. 47

7. Conclusion​ …………………………………………………………………………......... 51

Bibliography ​……………………………………………………………………………….... 54

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List of Tables

Table I: Models of Regulation: Prohibition, Uruguay and the US (Colorado)………….. 27

Table II: Models of Governance ……………………………………………………………. 29
Table III: Models of Uruguay and Colorado-US ………………………………………….. 30
Table IV: Personal Production ……………………………………………………………… 36
Table V: Club Production …………………………………………………………………… 37
Table VI: Production for the Wholesale Market …………………………………………... 38
Table VII: Product Control…………………………………………………………………… 39
Table VIII: Supply…………………………………………………………………………….. 40
Table IX: Vendor and Outlet………………………………………………………………… 41
Table X: Marketing…………………………………………………………………………… 42
Table XI: Harm Reduction…………………………………………………………………… 43
Table XII: Model of Price Control 1…………………………………………………………. 49
Table XIII: Model of Price Control 2………………………………………………………… 50

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Chapter 1
Introduction - On the Debris of a Lost War

In April 2016 the United Nations General Assembly held a Special Session on Drugs.
The last such summit was in 1998, when world leaders reaffirmed their commitment to
accomplish a “drug-free world”. The next session had been scheduled to take place in
2019, but the governments of Mexico, Colombia and Guatemala requested an early
meeting to “​analyse all available options, including regulatory or market measures, in
order to establish a new paradigm that prevents the flow of resources [of illegal drug
markets] to organized crime organizations” (Joint Declaration of the Governments of
Colombia, Guatemala and Mexico, 2012). No major document arose from the meeting
this year, since the special sessions are events in which the UN member states only
assess and debate global issues such as this. The April session, though, was a
demonstration of the distrust in the current international drug system. It showed that a
new understanding on drugs policy is emerging.

In 1998, the United Nations launched a global challenge to achieve a “free drugs world”.
The goal was to achieve a zero consumption and trade of illicit substances. The strict
(and rather unrealistic) approach was based on previous conventions dated four
decades back, when the doctrine of drugs prohibitionism as it is today was inaugurated.
It gained strength with the famous statement of American president Richard Nixon, who
in 1971 declared a “war on drugs”. Ever since, immense financial resources have been
allocated to curb consumption and drug trade. The ultimate goal is to kill a big and
profitable market, with high human costs.

The prohibitionism policies have become an essential tool in a bloody and costly war to
repress consumption and supply. The consequences can be seen in figures that show
thousands of lost lives every year in whole Western Hemisphere. The power struggle

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behind the scenes of the drugs war has also ruined institutions turning some countries
into quasi failed states. The international drug system has generated such harmful side
effects that there is a growing understanding that the current approach is a resound
failure.

According to the United Nations Office for Drugs and Crime, in spite of the billions spent
on counter-drugs policies, the drug market has been growing steadily ever since and in
2005 valued US$ 322 billion (World Drug Report, 2005, p. 16). Only in 2014, about 250
million people, or 1 in 20 adults aged 15-64 years, used at least one illegal substance,
cannabis being the most consumed (World Drug Report, 2006, p. 29). There are no
accurate projections on the share of cannabis in overall drugs market, but most of the
experts agree that it should be more than half of the whole narcotraffic. A research by
the European Union affirms that in Europe, alone, cannabis represent ​two-fifths of the
total illicit market of drugs. They estimated that regulated cannabis for recreational and
medical purposes would make a market of 9.3 billion of euros (EU Drug Markets Report,
2016). Although the drug problem represents a threat to human rights, security and
health, it is now perceived as a business opportunity. Experts point that regulation of
cannabis, a substance whose effects are no worse than alcohol and tobacco (​Johns,
2001)​, could diminish the violent side-effects of the war on drugs and generate revenue.
Among the obstacles ahead is social stigma.

In 2012, the voters of Colorado, in the United States, approved in a referendum a new
legislation to regulate cannabis market for recreational purposes. In 2013, Uruguay
became the first country of the world to fully regulate the supply and consumption of
cannabis nationwide. Other US states like Washington, Alaska and Oregon and the
District of Columbia followed the trend and established similar legislations (Shockshi,
2015). The regulation of cannabis is foreseen as the big shift of the international drug
system in the coming years. However, the key challenge ahead is how to regulate it and
achieve the desired goals of this new legal framework.

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1.1. The Subject of this Dissertation

This dissertation assumes that the current international drug system has failed and a
new approach is needed. It will analyse the models of regulation for the whole chain of
cannabis markets for recreational use, only. It will not consider medical cannabis, due to
the fact that this category follows specific regulation, already in place in dozens of
countries and local jurisdictions under diverse institutional frameworks.

This dissertation aims to explore if there is an optimum level of regulation in the case of
legal cannabis market. It will observe the current legislations of Uruguay and Colorado,
in the US. Also, it aims to analyse the guiding-principles of the regulatory design and
how much state intervention would be desirable. It examines the available models of full
regulation, those with rules for each stage of production, supply and retail. It
understands that lower degrees of regulation represent an important step but they do
not complete the regulation cycle of turning of taking a black market under the law.
Such are the cases of the decriminalisation of consumption (like Portugal) and the
partially regulated trade of cannabis (as in the Netherlands).

This dissertation has chosen to approach cannabis regulation instead of other drugs
because there is a wide scientific understanding that cannabis is not more harmful than
licit drugs like tobacco and alcohol ​(​Johns, 2001). The mainstream debate on drug
policy push for a review in the whole system of drugs. However, only cannabis has been
under a regulatory experiment so far, in Uruguay and in the US, generating data for a
public policy analysis and model proposal.

1.3. Dissertation Structure

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In ​Chapter 2 - The Current Status of Regulation - Prohibitionism and Policy
Failure comes the explanation of what consists the “drugs problem” (Kleiman, 1995). It
also addresses the meaning of a regulation failure, what sign of the current regime of
control no longer works, and the reason why the regulation has failed to achieve its
stipulated goals (Baldwin ​et all,​ 2012).

Chapter 3 - The Task of Regulation - Methodology and Theoretical Review ​explains

the policy process, defines the concept of regulation and addresses the theory on
regulation reform (Baldwin et all, 2012). It presents the guiding-principles for regulation
of the New Zealand Government (The Best Practise Regulation Model, 2012). They will
be the base of a model for regulation of legal cannabis market to be presented in
chapter 5.

Chapter 4 - Uruguay and the US - Two Models of Governance presents the ongoing
approaches in fully regulated cannabis markets. It compares both regimes (Levi-Faur,
2015) and characterises the functions of governance in the policy process. It classifies
the models as state-led or private-run. It discusses the role of public and private sector
in the regulatory framework and issues of health and business.

In Chapter 5 - The Task of Regulation the dissertation presents a model for cannabis
market regulation. It is based on the principles of regulation describe in chapter 3 (The
Best Practise Regulation Model, 2012). It analyses the core stages of regulation, from
supply to marketing and harm reduction policies (Rolles and Murking, 2013).

Chapter 6 - Price and Taxation presents the theory of price (Rosen and Gayen, 2009),
how pricing defines the whole chain of regulation and how it has implications in the
economic behaviour of consumers (Weber, 2012). A specific model for pricing and
taxation in a regulated cannabis market is presented (Rolles and Murking, 2013) (The
Best Practise Regulation Model, 2012).

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1.4. Literature review

The literature on regulation of cannabis market is not yet extensive. It is still at an early
stage. The most updated and complete source of data is the report ‘How To Regulate
Cannabis’, written by ​Rolles and Murking (2013)​. It reviews in depth the main aspects
of regulation and has a bold and clear methodology which made it the most important
reference of this dissertation. The model presented in this dissertation was based on the
guiding principles presented in this report and hopefully could serve as a contribution to
the topic of cannabis regulation.

Kleiman (1995) ​and ​Kleiman and Ziskind (2014) ​present a whole range of issues to
be considered at regulating cannabis. In spite of the uncertainties of key questions, their
argument embrace the needs or regulatory experimentation, pointing out the main
aspects of regulation, from intellectual to health questions.

Baldwin et all (2012) are the authors of one of the most important references on
regulation. They will provide the tools to analyse a regulation failure and the whole
policy process. The concepts for regulatory reform and the principles that should guide
it are all discussed here.

Collins (2014) describes the evolution of the legal framework of the international drug
system. His work has a historical and analytical approach that helps to explain the
failures on drug policy.

Caulkins (2014) ​shows the economics behind the prohibition, how crackdown on
supply inflates prices in the final markets and how the free-drug goals are unrealistic.

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Mejia and Restrepo (2014) ​examine the consequences of prohibitionism on producer
and transit countries. They show that the current system transfers the cost of the “war
on drugs” from the final markets to the impoverished areas of production and transit.
This would be one of the reasons that Latin American governments are leading the
debate on a new drugs policy.

The methodological approach taken by the seven principles of the ​Best Practises
Regulation (2012)​, developed by the Treasury of New Zealand, will- in this dissertation-
serve as a model when analysing the current models and composing a model for
cannabis regulation.

The ideas of ​Levi-Faur (2015) to characterise the functions of governance of modern

and contemporary capitalism, the concepts of rowing and steering, will give the tools to
describe the current models of regulation in cannabis market. The dissertation defines
the types of governance as being state-led or private-run.

Rosen and Gayen (2009) ​wrote one of the most important guides on public finance.
This dissertation will use their explanation on how pricing and taxation work. It presents
key concepts to analyse the process of taxation and price definition.

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Chapter 2
The Current Regulation - Prohibitionism and Policy Failure

The debate on regulating the drugs market is often pictured as the process of building a
regulatory framework from scratch. This is a misunderstanding. The fact that cannabis
or other drugs are not available for sale in specialised stores or pharmacies does not
mean that there is a lack of regulation in course. On the contrary, the current state is of
a strict regulation to impose full prohibition in most of the countries, with some degrees
of variations in a few cases, like the Netherlands and Spain. Overall, the current state of
regulation, though, is the one of prohibition.

Prohibition, however, is a recent regime in the history of mankind. For most of the time,
entorpecentes have been tolerated and, in some occasions, even taken as a profitable
source of trade, as was the case of the opium in China, traded by the British. Threats to
the profitable good ended up in two wars in the 19th century. The wars helped a moral
debate to emerge, whether substances such as opium should be freely traded in order
to fulfill a recreational demand (Collins, 2014, p. 9).

The first international drug system was enabled in 1912 during the International Opium
Convention in the Hague. The pioneer treaty established the first set of rules on how to
deal with psychotropic substances, either for medical or recreational purposes. The last
one was forbidden. In 1961, most of world countries signed the United Nations Single
Convention on Narcotic Drugs, prohibiting the trade and consumption of drugs. In 1971,
a new convention added some more substances in the basket of illegal drugs. Following
the increasing consumption and the harsh rhetoric against narcotics, forged on the
years of the so called “War on Drugs”, 185 countries joined t​he United Nations
Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, in
1988. The main change brought by the treaty was the criminalisation of consumption

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and trade, since the text requires the signatory countries to forbid any market of
controlled substances, other than those used for medical purposes ​(Collins, 2014, p. 9).

No country has ever denounced any of the three main treaties, which indicates a world
political consensus on the international drug system. However, in the local level many
countries and circumscriptions have been bending the general benchmarks by making
reforms on drugs policies that follows a growing understanding that the current system
has failed to achieve the goals it purposed (The Economist, 2016).

2.1. The Drugs Problem

Kleiman (1995, p. 473) argues that the “drug problem”, as he calls it, poses an
intellectual challenge to lawmakers, since it threatens some aspects of the classical
liberalism and the welfare economics. Regarding the first, the question which arises is
whether the state should intervene in individual’s choices of life. The current system of
control denies individuals the right to take illegal substances. It states it acts on behalf of
individuals’ own health and safety. From the perspective of the individual, analysing it
with welfare economics principles, Kleiman considers the fact that if individuals take
drugs they may enjoy any sort of “pleasurable effects”. Facing these two questions, he
unveils other aspects of the issue, as the widely known harm caused by drug abuse, not
only in the case of illegal drugs. The health damage caused by freely traded
substances, like alcohol and tobacco, is widely known. Kleiman classifies drugs as “vice
goods”, which in behavioural economics is different to “virtuous goods”. Vice goods are
associated with moral negative judgements. They are frequently associated with
depravation and are seen as potential threat to someone's character. The behaviour of
a consumer with vice goods is one of post-guilt. He or she avoids the idea of consuming
it on a long-run. That is why common-sale promotion techniques may not apply here.
However, discounts and decreasing price may catch this consumer, at least in the short
or middle-run (Wilkinson and Klaes, 2012, p. 97).

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Because they are “vice goods”, drug markets should not be under a traditional model of
regulation according to Kleiman (1995, p. 478). In the classical systems of control,
consumers seek to maximise the utility of their given preferences. This should not be
the purpose here. Overconsumption of entorpecentes can cause damage not only to the
individual but also to third parties. The key argument used in most drug policies
approaches is that the state should protect citizens from their harmful consumer
behaviour and as well as to consequences related with general drugs consumption.

This is the sort of argument that could support any side of the debate: the current
prohibitionism or a new drugs policy based on regulation and administered use of
current illegal substances. There are different views of the role of the state in society
according to different political economic views, on the right or left-side ​(The Economist,
2016). Kleiman (1995, p. 475) cites other ideas used to build up the current legal
framework and which is used to review it or even dismantle it. Economists Thomas
Schelling, Jon Elster and Tibor Scitovsky (in Kleiman, 1995, p. 475) argue in defence of
the so called “communitarian” or “conservative values”, in confrontation to the classical
ideals of liberalism, inherited from the Scottish Enlightenment. Their argument is that a
kind of public character is desirable in a society. The matter then is to set which is the
desirable character. Having chosen a society with a regulated drugs market, for
example, the next task is the definition of a regulatory framework to pursue the
outcomes to be generated by the system of control.

Still, changing per se does not mean success. Kleiman (1995, p. 477) recalls a quote of
American economist Francis Bator who once said that a judge in a music contest with
two contenders cannot conclude the second one is the winner after hearing only the
first. He uses this argument to say that any change in the drugs policy must bear in
mind the possible side-effects of a full regulation, for example. It is time to measure the
weight and the consequences of the current system of control as well as the costs of

16
drug abuse committed within this legal framework. The next task is to compare it to the
weight and consequences of another system of control plus the abuse costs committed
within a new and different legal framework. The understanding of this dissertation is that
there is a regulation failure in the international drug system.

2.3. Regulation Failure

Failure in the regulatory framework, as defined by Baldwing ​et al ​(2011, pp. 68-82), is
seen when the regulators fail to deliver the outcomes stipulated in their mandates. It
happens when the regulatory system does not produce the expected results it was
supposed to generate. These negative outputs arises either due to the inefficiency of
the regulatory framework or to side-effects of this same legislation. It is important to
have in mind what failure means in that particular context. If something has failed that
means that there should be a successful framework. The authors stress the relevance
of asking: “Failure compared to what?” The usual response to that rhetorical question is
the debate on what would be a good regulation. The evaluation involves comparison to
other potential regimes of control and the potential outcomes that could be generated.
Any regulatory system, then, is built after a series of trade-offs. The regulator must
choose the best tools to achieve the outcome he or she is supposed to deliver in their
mandates. There are other sources of regulatory failure, such as under-regulation or
over-regulation. In the first case, the level of regulation may not be the most adequate to
achieve the goals it was meant to. In the second case, the extensiveness of the
regulation may be counterproductive to generate the expected outcomes. The
over-regulation is a kind of over-stringent regulation that reduces possibilities of
innovation and the capacity of response. Another source of failure is the wrong choice
of regulatory instruments.

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The response to the regulatory failure can be driven by different actors with distinct
aspirations and goals. The ​interest group theories argue that any change comes as a
result of pressure and interest of specific groups. Those changes can be pushed by
advocacy coalitions which seek to shape the new regulatory system due to their own
interests. Another push for regulatory changes could be driven by ​idea-based
approaches,​ which come as a result of a growing understanding that new regulatory
tools are the best response to a particular problem. When the system of control is based
on an unsustainable framework that will not generate the desirable outcomes. It means
that the key assumption on which lies the foundation of that regulation is basically
wrong (Baldwin ​et all,​ 2011, p. 67).

Once the regulation failure is detected and explained, it is time to answer the question if
the current regulation system has been employing the wrong set of rules. If the
conclusion is that, yes, it has, then it is time to consider change. The response for
regulatory failure is a new regulatory framework. The task is to design it, implement it
and generate the desirable outcomes.

2.4. Drugs Policy Failure

The failure in the current international drugs system comes to light once the model used
by Baldwin ​et all (2011) is applied to characterise the regulation’s non-success. The
pursuit of the UN treaties is to achieve a “drug-free world” (Collins, 2014, p. 10). The
goal of the prohibitionist regime is to end the consumption and the trade of illegal
substances. Nonetheless, there is a market, which is big, transnational and profitable.
There is a growing consensus that these goals are unachievable and this is the main
sign of failure, since the regulators will not deliver what was stipulated in their
mandates.

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The economic failure even goes beyond. Collins (2014, p. 10) explains that in an
attempt to achieve an “unrealistic goal”, policymakers allocate very substantial
resources in this plan. Billions are spent in highly repressive policies towards supply and
demand. The measures include military intervention, border enforcements and
criminalisation of consumption. Nevertheless, the strategy lies on a fundamental policy
paradox. Research has shown that demand for drugs remains relatively constant. In this
case, cutting supply can generate short-run price effects. The prices will increase and
incentivise new rise in illegal supply, by shifting commodity supply chains. The market
tends to return to an equilibrium similar to the one prior to the supply intervention after a
while. But this is a costly equilibrium, since the impact in the supply chain means that
the most efficient actors in the market will put aside the less efficient. In an illegal trade
such as drug’s trade, one of the measures of the efficiency is the power to employ
violence. The new patterns of equilibrium in the drug’s market help to explain the high
violence generated by the narcotraffic in Latin America. The main target of the
prohibitionist regulation, the reduction of consumption and supply, was clearly not
achieved (Collins, 2014).

The related violence is perhaps the main sign of the failure of the prohibitionist regime
of drugs control. Much of the current legal framework was based on the idea of
protecting citizenry of the damaged caused by drug consumption. However, the damage
caused as consequence of a prohibitionist regime of control is much higher if one
compares the number of people killed by overdose with those who lost their lives in the
battles of the war on drugs.

The Alternative World Drugs Report (2016, p. 69) says that no debate should exclude
that criminalisation of consenting activities if a substantial part of the world's population
has sound human costs. It deeply and widely impacts human rights, such as the right to
health, privacy, and freedom of belief and practice. Since the criminalisation occupies a

19
central place in the current international system, the report states that “in reality a war
on drugs is, to a significant degree, a war on drug users – a war on people”.

In Mexico, several studies concluded that after a fiercer repression of the central
government on cartels pushed the homicide rate from about eight homicides per
100,000 individuals in 2006 to more than 23 in 2010. In Colombia, the homicide rates
evolves according to the escalation of the war on drugs. During the most dramatic years
of Pablo Escobar’s traffic activity, the homicide rate reached 72 per 100,000 inhabitants
in 1993, while in his town, Medellin, the homicide rate went up to 420. Even though
there is no specific data collection pointing if the deaths were related to
narcotraffic-related activities, experts concluded that it plays an extremely substantial
role in violence overall (Restrepo and Mejia, 2014, p. 30).

Drugs related criminalisation also highly impacts incarceration. Out of the 9 million
individuals currently behind bars in the world, 40% were arrested under drug offences
accusations (Drucker, 2014, p. 62). Data collected by the Brazilian Ministry of Justice
shows that Brazil became the fourth in the ranking of world incarceration since it
establishes harsh punishment on trafficking in 2006. In 2015, 607.700 people were in
prison, 27% of them due to drug offences. The US occupies the top in the ranking, with
2,2 million prisoners (Levantamento Nacional de Informacoes Penitenciarias, 2014).
There is also a strong racial component in the drugs crackdown, since people of colour
are the most hit. According to official data in the US, almost 80% of prisoners in federal
facilities and nearly 60% in state prisons, who are held for drug offenses are either black
or latino (The Drug War, Mass Incarceration and Race, 2016, p. 2).

Once there is a transnational trade of narcotics, the consequences of the failed

regulation hit some countries more than others. The international illegal trade takes
place in three categories of countries: the consumers, the transit countries and the
producers. While consumption is criminalised in most parts of the world, there is an

20
increasing ​de jure (​ written in law), and mainly ​de facto (common law)​, decriminalisation
approach of security forces. The tough hand of the state is mostly used to curb supply.
And this has geopolitical impacts. The main consumer markets are usually developed
countries, while the suppliers, the transit and producer nations, are poorer. Mejia and
Restrepo (2015, p. 27) argue that from a perspective of political economy, the current
regime of prohibition transfer the costs of the repression from the consumer to the
producer and transit countries. Under the UN treaties, there should be a joint effort to
curb drugs supply in order to increase the prices to diminish the consumption. However,
there are signs that the demand could be elastic depending on the consumer and the
sort of substance taken. That means that the demand will not decrease. And the
strategy of crack-down of the supply chains mostly hit the producer and in transit
countries. The side-effects can be especially seen in Latin America. The region has
some of the highest homicide rates in the world. Strong drugs cartel have also made the
already poor records of corruption get even worse, in the wake of weakening state
institutions.

Mejia and Restrepo (2015, p. 28) point out three signs of failure in the drugs policy, from
a perspective of producing and transit countries. They say that, despite the efforts and
substantial allocation of resources, the strategy of supply-reduction to reduce the flow of
drugs to the main markets, such as the US and Europe, has not worked. Second point
is the low costs of implementation of supply-reduction efforts in producing and transit
countries in order to stop the flow. This strategy turned out to be unrealistic, with costly
side-effects for countries such as Colombia, Mexico and Central-American nations. The
third point is the willingness of producing and transit countries to mortgage their national
security in order to diminish the drugs flow. The power of drugs cartels has become an
institutional menace and created quasi-failed states.

2.4. Stalemate

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The international drug system currently experiences a stalemate, according to Room ​et
all ​(2012, pp. 92-94). On one hand, there is growing understanding that the
prohibitionist regime has failed in its purposes. On the other hand, there is a whole state
machinery structured to repress the supply and demand of drugs, either on the local or
international levels. The three UN main convention on drugs represent a tidy legal
framework which does not leave much room for change and any sort of regulation
experiment in a national level may have political and economic implications in a regional
or global scale. In the document Roadmap to Reforms in the United Nations, he reckons
that despite the increasing debate on legalising cannabis there is still a strong
opposition worldwide to a full regulation system. He cites a pool of the Eurobarometer
showing that only one in four Europeans favour reforms towards legalisation of
cannabis. While some libertarians advocate for regulation (or non-regulation) of all
drugs, the document’s argument shows that cannabis as a starting point may be a
tremendous input to dismantle the current prohibitionist system of control. According to
the 2005 World Drug Report, 80% of the 200 million people who take entorpecentes in
the world use cannabis. All the other listed substances are used by 40 million people.
According to his argument, these remaining drugs takers, representing less than 1% of
the global population, are not a threat to the international security. Since cannabis
makes most of the illegal trade, once it is legalised, it will mean a big blow to the general
black market for illegal substances. Smuggling will not end, but the side-effects of a
huge drug trade can certainly diminish since the black market would be cut-down
dramatically. The current dynamic of international trade could also suffer a big blow
once many of the final markets may stop importing by self-supplying with their own
cannabis.

22
Chapter 3
How to Regulate - Methodology and Theoretical Framework

In response to the failure of the prohibitionism, some countries and local governments
started to adopt new policies towards drugs consumption and trade. There are several
​ nd ​de jure.
levels of regulation, which could be classed as two types, namely: ​de facto a
The first type, ​de facto​, means a new approach of authorities not rooted in any new
legislation, taking a tolerant attitude towards certain kinds of drugs and towards
consumers. The ​de jure regulation means new rules set in legislation reforms.
Regarding the levels of legislation, the changes could come through a depenalisation
(lowering the penalties, for example), decriminalisation (removing drugs consumption
from the category of criminal offence, as it happens in Portugal) and regulation (by
legalizing the supply and consumption of drugs), which could be partial (the Spanish
model, which allows cannabis clubs) or a full regulation, that form the subject of this
dissertation (Rolles and Murking, 2013, p. 31).

The issue of regulating cannabis or other illicit drugs is a matter of policy reform. It is the
transition from a system to another. A whole policy process will need to get under way.
Several authors such as Parsons (1995, pp. 78-79), summarized different models in the
policy life cycle. The first step is to perceive that there is a "problem", that something is
in need of change. The subsequent step is to appoint the direction of the change. The
same approach is taken by other authors. For Rose (in Parsons, 1995, pp. 78-79), there
is a "public recognition of the need of a policy to exist. Mack (in Parsons, 1995, pp.
78-79) calls it "deciding to decide: problem recognition".

3.1. Policy Process

Different models of policy process can be used in the analysis of public policy
implementation. The so-called sequentials are the most commons, while different terms

23
can be used by other authors to name them. The linear structure is pretty much the
same: first comes the problem recognition, before advancing to an agenda setting.
Finally, comes the design and implementation of the policy programmes. Then last step
is evaluation (Parsons, 1995, pp. 78-79).

The current dissertation focuses on the design and implementation of a regulatory

framework for supply, trade and consumption of recreational purposes of cannabis in a
legal market. As shown in the Introduction and in chapter 2, there is clearly a problem
regarding the international drug system. This dissertation has as an assumption that the
current prohibitionist approach has failed. Once a problem is detected, the interested
parts will get to mobilize in order to move it forward. The aforementioned models of
regulatory change shed light on what the next steps should be. They are perfectly
rational. However, things are not necessarily as predictable as in theory. A wide range
of external elements can challenge the progress of the policy process, such as budget
cuts, parliamentary opposition, changes in government, lobbies and public opinion.

The issue of cannabis regulation is a sound example of public policy surrounded by

controversy and fierce opposition of conservative groups whose main argument is of
moral character. Kleiman (1995, p. 474) calls it the current arrangement of “drug
problem”, saying that it challenges intellectual fundamentals of both the classic
liberalism and the welfare economics, as mentioned in chapter 2. For Kleiman (1995, p.
475), the current international drug’ system of control, the prohibitionism, pushes ahead
an illicit trade of substances. Black markets, on its turn, often generate violence and
disorder with enormous side-effects. The fundamental question on drugs market
regulation lies on a trade-off between the current prohibitionist system of control and a
regulated approach. The equation must measure if the current costs of control plus
social costs of abuse overweigh the control plus abuse costs in an alternative approach.
In other words, it must measure which system brings more costs to the society.

24
3.2. Concept of Regulation

The concept of regulation is extensive. The basic definition is the direct intervention of
the state in some activities, mostly economical, but also environmental and of other
nature, seeking specific goals. Baldwin ​et al (in Koop and Lodge, 2015, p. 1) present
three basic definitions. The first says that regulation is the establishment of a set rules
with enforcement mechanisms. The second reckons the role and the efforts of
regulatory agencies to steer the economy. The third defines regulation as a tool for
social control implemented not only by the state, but also by other actors. The last is the
concept best fit to define the regulatory framework for a licit cannabis market.

Public interest is the most powerful argument to support regulation. The whole society,
or at least the most of it, could benefit from state-intervention here. For Baldwin ​et al
(2012, p. 41), the purpose of regulation is to generate results when the market fails to
guarantee this general benefit. It would function as a mechanism to avoid market failure
and its negative externalities. In the present case, the regulation is not to respond to a
market failure, but to overcome a structural mistake which is to suffocate a robust
market which will survive under illegality and whose side effects can be devastating.
Here, the objective is to let the market flow, within well-established rules.

For Stigler (1971), the “protection of the public” theory means that regulation is acts as a
tool to protect and benefit the general public interest of society or certain groups.
Politics become the benefactor in this game where the players compete to impose their
views. The “protection of the public” theory by Stigler could pretty much be used to
argue in favour of prohibitionism. So, any regulatory framework must be set according
to the goals to be achieved.

3.3. Criteria for a ‘Good Regulation’

25
Once the policy process lead to setting of a new regime of control, it is time to design it.
Baldwin et al ​(2011, p. 25) reckon that some economists argue that the best criteria for
regulation is efficiency, since it maximises wealth production. Wealth per se, however,
does not grant any rights to the citizenry. Therefore, it should not be the core measure
to imply regulation. They say that the regulatory regime should be worth of support to be
legitimate. Therefore, there are a series of fundamentals which work as benchmarks to
assess a new regime of control. ​Baldwin et al (​ 2011, p. 25) defined five criteria to guide
the establishment of a new regulation system. The agenda-setting process is full of
trade-offs. The choice should be made in order to achieve the goals defined by the
regulator mandate. These benchmarks will also be the fundamentals to later measure
the efficiency and the quality of the regulatory regime.

The first criteria is (1) The Legislative Mandate. The issue here is that if the new regime
of control is supported by legislative authority, it is grounded on democratic
fundamentals. This idea is based on the aforementioned argument of the public interest,
since the Parliament is the legal representative of the citizenry and makes decision on
behalf of their constituencies.

The following criteria is (2) Accountability. Regulators should be accountable for their
decisions. The source of the independence to oversee the policy process is the
legislative mandate. If that is clearly defined, the regulators will feel free to make the
best decisions from the perspective of the public interest. Thus, regulators should hold
accountability for their decisions.

The criteria (3) Due Process means that regulatory procedures should be fair, open and
accessible. The legal framework should encourage equality and consistency of
treatment as well as the affected parts and the general public participation. The rules,
however, should be clear in terms of how this would work, in order to keep a good
functioning of the system.

26
The (4) Expertise criteria states that the regulator faced frequently a series of trade-offs
and must be equipped with expertise to respond the challenges of the regulation
agenda-setting.

The last criteria is (5) Efficiency. It means that the regulator should implement certain
policies using the least possible level of inputs, which in other words means low costs,
while at the same time getting the best output. Beyond the issue of the most efficient
allocation of resources, the last criteria to measure if the goals defined by the regulator
mandate will be achieved or not.

These five criteria shed light on what kind of regulatory system is the most adequate
and prepare the ground to the regulatory system design itself. Further below, this
chapter will present the expected goals to be achieved by cannabis regulation and the
principles to guide the design of this regulatory model.

3.4. Lessons from the Tobacco and Alcohol Regulation

The regulation of cannabis offer an opportunity to design rules for a rising industry in a
blank canvas without an organised sector to resisting regulation change. It can take
valuable lessons from the alcohol and tobacco industry, specially knowing what it
should not do. Over the past years, governments across the world have been imposing
tougher regulation on these last two industries, moving the rules from a more
commercial spectrum towards higher levels of government intervention aiming
public-health goals.

Once more there is a cost-benefit equation: getting the right balance between a
profit-making oriented policies towards a harm-reduction spectrum, under a
public-health perspective. Obviously, there is no perfect solution for that, nor an

27
optimum degree of regulation. Roles and Murkim (2013, pp. 42-44) advocate that
cannabis regulatory regimes should be more strict than the tobacco and alcohol
regulations. They argue that risks of over-commercialisation can undermine the efforts
to achieve better health records and reduce harm. They state their belief in that “drug
policy should serve the interests of public health and wellbeing, not business”.

Kleiman and Ziskind (2014, p. 82) have the same approach. They say that regulating
cannabis under the alcohol/tobacco model is “the second-worst option” behind
prohibition. Commercialisation, for them, generates an incentive for heavy use and all
their related consequences. They say that the new regulatory regimes could range from
state-monopolies to non-profit regimes. That is why the pricing and taxation architecture
is so important. In this case, regulation should be flexible to address evolving questions,
since the future here is full of uncertainties.

3.5. Goals of the Cannabis Regulation

After defining regulation and discussing what ought to be the appropriate criteria for
guiding a good regulatory regime, it is time to move forward and design a model of
regulation to the cannabis market. Before setting the guidelines on how to achieve it,
under which principles, it is necessary to define the goals one wants to reach with a new
regulatory framework. These goals are to be set in the regulator mandate, given by the
executive and legislative authorities.

Based on the current debate on a new drugs policy and in the platform of several
advocacy coalitions, this dissertation defines a set of goals that the regulation of
cannabis for recreational purposes should pursue. They will serve as benchmarks to
later determine if the new regulatory framework and its implementation will be
successful. Any sort of regulation should pursue these objectives, which could be
framed as of public interest.

28
The five goals to be achieved are: (1) dismantling the black market; (2) decreasing
criminality and violence; (3) avoiding over consumption and health-related problems; (4)
improving the state of human rights, civil liberties and democratic institutions; and (5)
increasing the public revenue.

These goals are the starting point of the model of regulation this dissertation aims to
offer. Further below, a set of seven principles used by the New Zealand government to
guide their regulatory reforms will be presented (The Best Practise Regulation Model,
2012). But prior to design the regulatory model based on these principles, it is
necessary to know where this new legal framework will lead to. Having said that, the
regulation model for cannabis market should take into consideration the following
questions:

(1)​​Will regulation dismantle the black market?

(2)​​Will regulation reduce criminality and violence?
(3)​​Will regulation increase consumption and health-related problems?
(4)​​Will regulation improve the state of human rights, civil liberties and democratic?
(5)​​Will regulation increase the public revenue?

3.6. Regulatory Design

Having the aforementioned goals as targets in a regulatory regime, this dissertation will
takes the Best Practises Regulation (2012) model as a guide to analyse the currently
existent markets of regulated cannabis in the subsequent chapters. The BPR will also
guide the debate on if there is an optimum level of regulation in this case.

The BPR was developed by the New Zealand’s Treasury, which was challenged to
deliver a model to measure and respond the following questions: “(1) What is a best

29
practice regulation; (2) How close we are to the frontier; and (3) What we can do to get
closer. These are the seven principles (The Best Practise Regulation Model, 2012):

(1) P
​ roportionality: the burden of the regulatory regime should not be heavy to the

point that will impact negatively the results. The rules should be proportional in a
cost-benefit relationship in which the risks are measured and the regulation is
efficient to avoid side-effects such as corruption.

​ ertainty: ​the rules should be clear in order for the system to be predictable, to
(2) C
guarantee certainty to regulated entities.

​ lexibility: ​while rules should be clear in order to provide certainty to the

(3) F
interested parties, there should be flexibility mechanisms to respond any sorts of
change in the public policy horizon. The set of rules should not be as rigid as to
prevent innovation and least cost approaches only due to the legal obligations.

​ urability: ​the system should be equipped with mechanisms to respond to new

(4) D
demands which may arise throughout the time. This principle is linked to
flexibility, since it means that, the more flexible the system of control is, the more
it will generate responses for new regulatory demands.

(5) T
​ ransparency and Accountability: the process of regulation should be clear to

not generate any sort of distrust. Regulators will be asked to explain their
decisions and the system should be designed to respond to public scrutiny.
Non-discrimination, provision for appeals and solid legal basis for decision should
also be attributes of a good regulation.

​ apable Regulators: ​regulators or regulatory agency should be equipped with

(6) C
enough expertise and resources to operate the regime of control. Independent

30
 reviews and assessments of the regulatory body may contribute to its
effectiveness.

​ rowth Supporting: ​this is the only principle associated with a particular

(7) G
outcome. According to BPR, economic objectives such as innovation,
competition, compliance costs have a relative weight compared to other
objectives in the previous principles. The other objectives meant in the BPR are
in areas like health, safety, environment, consumer, and investors’ protection. It
says that BRP “does not assume that growth should be given prominence over
other outcomes, but reflects that growth as an objective is not always identified or
given due weight”.

Having set the goals should be pursued in a regulatory framework for legal cannabis
industry and the principles that should guide the design of its regulation regime, we now
have the reference setting to analyse models in use and to debate and present
alternatives for them in a regulatory reform towards cannabis regulation.

31
Chapter 4
Uruguay and the US - Two Models of Governance

In the current year (2016), only a few places in the world have taken the pioneer
decision to fully regulate cannabis. This dissertation will showcase only two in details,
Uruguay and Colorado (US). The reason to choose is mainly because of the different
approaches taken by the latter countries towards cannabis regulation. While Uruguay
has designed a system of heavy state intervention, with the state controlling production,
retails and consumption, Colorado opted for a business oriented model of regulation.
There is a clear set of regulatory rules, but the whole market is played by the private
sector. If in Uruguay cannabis (available only in raw form) can be bought by registered
national citizens, in Colorado, cannabis and cannabis infused products can be found in
specialised stores. The US states of Washington, Alaska, Oregon and the District of
Columbia have also regulated cannabis following a model very similar of the pioneering
Colorado, except in minor details (Rolles and Murking, 2013). This explains why
Colorado is picked to represent the American model of regulation of cannabis market.
One can call it ​private-run model​, while the Uruguayan will be characterised as a
state-led model​.

4.1. Models of Regulation

Before going in depth with both models, we will describe some different models of
cannabis regulation for recreational purposes currently in use in the world, according to
the summary developed by (Rolles and Murking, 2013, pp. 32-39). Not all models listed
by him will be described, since the topics on regulation of cannabis for medical use
were put aside - as explained in the Introduction, this dissertation opted for not covering
this topic. The current models of regulations are:

32
 1. P
​ rohibition of all production, supply and use: the regime in course in most of

the world. The penalties vary according to each country and could range from
fines and formal warning to prosecution, incarceration and even death penalty.

2. P
​ rohibition of production and supply with decriminalisation of possession

for personal use: production and supply remain outlawed, but possession for
personal use is no longer is treated as a criminal offense. The amount of the
possession and the degree of punishment, like fines or confiscation, will vary
according to the local legislation or practise. The decriminalisation regime can be
de jure,​ based on written law, or ​de facto,​ based on the approach taken by the
local authorities.

3. ​Prohibition of production and supply with decriminalisation of possession

for personal use and some retails sales: ​production and supply remain
outlawed, but possession for personal use and some retail sale are no longer
treated as criminal offenses. This is the Dutch model, where the sale of cannabis
is tolerated in some coffeeshops (under local regulation), while the production
and supply remain illegal. In practise, the government has a ​de facto semi
regulation towards retail, but ignores the backyard drug trade to supply the
shops.

4. P
​ rohibition of production and supply with decriminalisation of small-scale

personal cultivation and cannabis social clubs: ​while maintaining the

prohibition on production and supply, it tolerates ​de facto or regulates ​de jure
cultivation for personal or for club use. Some countries in Europe such as
Belgium and Nordic countries have taken this approach, but only Spain formally
permits cannabis clubs, under regulation of produced amount and the members
sharing.

33
 5. Regulated production and supply with a mix of commercial and
​

government monopoly elements: ​legal market, fully regulated, with state

monopoly on some stages of the producing cycle, like retail. This is the model of
Uruguay, where the government regulates the production and has the monopoly
of retails, with a heavy hand over all process.

6. Regulated production and supply with licenced producers and licensed

​

vendors: ​legal market, fully regulated, with the state granting licences for
producers and sellers, regulation the rules of retail, with an approach similar to
the alcohol and tobacco industry in some degrees. This is the American model.

4.2. Uruguayan and American Models

Before analysing both models, the following table show some of the key differences
between the Uruguayan and the US models, the last from the Colorado case, having
the full prohibition regime as a reference. The data is extrapolated from Rolles and
Murking (2013, pp. 236-243)

34
Table I: Models of Regulation: Prohibition, Uruguay and the US (Colorado)

Prohibition Uruguay US (Colorado)

Model No production, State-led model, Private-oriented,

supply or sale with strong with state regulation
allowed regulation and state but privately run
monopoly of supply

Personal No control Only six plants per Six plants per year
production person, up to 480
grams per year

Club Production No control Allows up to 99 Not regulated, but

(Cannabis club) plants per year for legislation is
a 45 maximum unclear and
member club ambiguous

Production for No production State contracts Production licences

Wholesale Market control, since it is private producers granted to private
an illegal market. and give them producers under
Producers are licences to run government
under control of cannabis in public regulation
criminal law land under
supervision of both
private and public
security forces

Product Control No control Only five varieties No restriction on

of plants are variety of plant; no
allowed; restrictions restriction of THC
on the potency, on level, while it must
the THC level be displayed in the
package

Supply Drug traffickers The state has the Licensed producers

under control of supply monopoly, supply licensed
criminal law buying the outlets. The law
wholesale allows and even

35
 production under requires, in some
fixed price to supply degree, licensed
pharmacies outlets to be
licensed producers
to partially
self-supply their
business

Vendor and Outlet Sales in the black Qualified Trained

market under professionals in professionals in
control of criminal pharmacies specialised shops
law

Purchaser Consumers can Only registered Residents can buy

Restrictions face criminal law or residents over 18 up to 1 ounce per
different degrees of years-old can buy. purchase and
punishment or Sales are restricted non-resident a
sanctions to 40 grams per quarter of this
depending on the month, no resale amount. 21 year-old
jurisdiction authorised. Rules only. Rules on
on public smoking public smoking
apply apply

Price Determined by the Pre-fixed by the Determined by the

unregulated black State market, after taxes
market, following
the supply and
demand law

Tax No taxation, with all No taxation defined 15% of excise tax

revenues diverted so far plus 10% of retail
to sellers and tax; excise tax goes
producers partially to a fund to
build schools;
revenues tax keep
the regulatory
system

Marketing No marketing Prohibited Prohibited

36
Harm Reduction No control Legislation predicts The excise tax of
information and 15% goes to a fund
education to build schools and
campaigns. There spread information
are restrictions and on drugs. Drivers
THC limits of who exceed 5ng/ml
driving, but not yet THC may face
fully regulated. punishment.

Source: ​(Rolles and Murking, 2013, pp. 236-243)

4.3. Public Sector versus Private Sector

The role of the state defines the two different approaches taken by the Uruguayan and
the American models of cannabis regulation. As shown in the table above, the
government plays a very important role in the whole process of production, supply, retail
and consumption in Uruguay. In the US, the private sector prevails.

To better assay both regimes of regulation, I will apply a model defined by Levi-Faur
(2015, p. 15) to assess the functions of governance. The author coined the terms
steering and rowing to describe the capitalist production process. Steering means
leading, thinking of, directing and guiding the process. Rowing is related to the
execution, the entrepreneurship and the provision of services. Levi-Faur applied the
model to analyse three stages of the modern capitalism: the ​Laissez Faire regime in the
19th century, the Welfare State in the middle 20th century and the Regulatory
Capitalism of nowadays, as shown in the table below.

Table II: Models of Governance

37
 Laissez Faire Welfare Regulatory
Capitalism Capitalism Capitalism
(1800’s to 1930’s) (1940’s to 1970’s) (1980’s to
nowadays)

Steering Business State State

Rowing Business State Business

Source: Levi-Faur (2005, p. 16)

​ eriod, there was almost no regulation. The state used to keep its
In the ​Laissez Faire p
traditional functions such as defence, but services and goods were mostly produced by
the private sector in a mostly unregulated market, where companies were both steering
and rowing the economy. In the Welfare period, defined in the post-war years, the state
became in many countries the major engine of the economy, owing companies,
producing goods and delivering public services. In the last period, the Regulatory
Capitalism, goods and services were mostly delivered by the private sector, though
under a strict regulation in many cases. The regulatory regime is mainly set by the state,
while there are some other players in the regulatory framework depending on the
adopted model (Levi-Faur, 2005, pp. 15-16).

It could be said that Uruguay has a Welfare Capitalism when it comes to cannabis
regulation, following the model of Levi-Faur. In the South-American country, cannabis is
produced in public land under supervision of public security personnel by producers
who were granted licences to grow it and sell it to the state. While the government
grants licences and contract private producers to grow, one cannot say that they act
with a private-sector spirit, seeking to make profit. Production quotas and prices are set
by the government. The government then has the monopolistic power to buy the whole
production to supply private pharmacies, where cannabis can only be sold to registered
consumers. In Uruguay, it could be said that the State steers and rows the production of
cannabis. In this dissertation, this will be called a state-led model of governance. It is

38
what Majone (1997) called a “positive state”, when the government plays an active role
in defining the production process of certain good.

The American case of Colorado, on its turn, could be defined as a typical case of
Regulatory Capitalism. There is a clear set of rules defined by the state, accountable for
the enforcement of the law, while the whole chain of production, supply and retail are
private. In the US, the state steers while companies row the business of cannabis. It is a
private-run model of governance, as shown in the table below. We used private-run
instead of private-led because, in the second case, the state keeps on playing a role,
which does not mean that the policy process is under private leadership.

Table III: Models of Uruguay and Colorado-US

Uruguay Colorado - US

Steering State State

Rowing State Business

Model State-led Private-run

Source: based on Levi-Faur (2005) model of governance functions

4.4. Choices of Regulation

The different approaches taken by Uruguay and in Colorado reflect their geopolitical
peculiarities as well as their culture of governance. Uruguay is a stable democracy that
has a small and homogenous population in a fairly small territory. The tiny country has a
long tradition of welfare state, dating back to the first decades of the 20th century. It also
had an interesting decision making process on the regulatory reform to legalise
cannabis for recreational purposes. Different from Colorado, where the law came
through a popular initiative proposal, later approved in a referendum, in Uruguay it was
led by former president Jose Mujica, with Parliament approval. The initiative had little

39
public support, with less than 50% of Uruguayans being in favour of cannabis legislation
back in 2013 (Gil, 2013). This helps to explain the more conservative approach taken on
the regulation of a controversial product such as cannabis, especially given its
pioneering status. It was a sort of top-down policy, making the Uruguayan model a
sound example of reform driven by what ​Baldwin ​et all (​ 2012, p. 49) call “power of
ideas”, in which a leader push some reforms with no grassroots demand. To the internal
policy process, one must take into account that Uruguay is a nation in a continent
marked by violence bolstered by the drug traffic. It is also surrounded by neighbouring
countries where cannabis is still illegal and criminalised. In Uruguay, the governance
process culminated in a model where the state took the mission of steering and rowing
the business of cannabis.

Colorado, on its turn, follows a less state-intrusive approach, following the business
culture of the US, where state intervention is not appreciated. Alike Uruguay, Colorado
took cannabis regulation as an experiment, but went further compared to the
South-American country. Its regulatory system opens a wider range of possibilities, by
allowing, for example, cannabis-based products. It is a system that seeks profit, while in
Uruguay it is taken under a strict perspective of public health and security, with no
profit-making ends. The Colorado experiment came out as a result of a popular
initiative, approved in a referendum, giving to the regulator a stronger mandate to define
a wider regulatory regime.

Both cases created regulatory entities. In Uruguay, the Institute for the Regulation and
Control of Cannabis is responsible for enforcing regulation. In Colorado it is the
Marijuana Enforcement Division of the Department of Revenue which takes this role,
likely to be the trend model in the cannabis regulatory process (Rolles and Murking,
2013). These peculiarities help to understand why two different places took such distinct
approaches. The most important matter, however, is to achieve the stipulated regulation
goals.

40
Chapter 5
The Task of Regulation - Key Challenges

Uruguay and the American states which fully regulated cannabis shed light on how to
set the rules in the reform process to legalise the currently illegal market. Both cases
have different approaches to the problem posed and present a different set of solutions.
Still the state and the private sector play distinct roles on it, the goals of their regulation
are similar, as well as are their challenges. How and where to produce? Should
Home-growing and club-sharing be permitted? Who is going to sell it? At what price,
after how much tax? How should corruption be avoided? How will the enforcement be?
Will marketing be allowed? How will abuse-related problems be dealt with? Are we
going to have a state-led model or a private-run instead? These vital considerations to
be pondered in the eventuality of regulation.

For Kleiman and Ziskind (2014, p. 77), beyond abstract questions such as individuals
liberties which favours regulation, or moral claims, standing against it, there should be a
cost-benefit analysis. The main challenge are the few variables still available to better
evaluate it, what could not be different once this is an early ongoing experiment. The
impact of regulation will also vary. Producing and transit countries will have a different
experience compared to consumer countries. The key uncertainties lying on the table
are the demand-side responses in terms of price after regulation, the issue of the social
stigma, the potential abuse risk, the risks on the development of cannabis-based
products, the effects of abuse in other drugs consumption.

Let us take as an example alcohol abuse, whose effects are widely known. There are
no conclusive studies on whether alcohol would be a complement (rather than be a
substitute, or vice versa) to cannabis. One would need a longer term investigation to
have a more accurate result. This relationship can also vary according to different
cultures and lifestyles. Since alcohol is way more damaging than cannabis (Johns,

41
2001), a potential increase in its consumption could mitigate the positive effects brought
by cannabis regulation (Kleiman and Ziskind, 2014, p. 77). Another key concern is if
legal cannabis could lead to higher exposure to more damaging and also illicit
substances such as cocaine and heroin. The exposure and risk-factor of minors drug
abuse is a preoccupation. Though there are no records of deceases for cannabis
overdose, recent studies show that it could impact pre-existing mental illness. It is also
risk-factor for mental disorders like panic, anxiety, depression or psychosis (Johns,
2001).

The task is to weigh the costs and the benefits. In this chapter we will present a model
to design regulation of non-medical purposes cannabis, under a state-led or a
private-run governance. The model is composed by 9 out of the 11 main issues that a
regulator will face in setting the regime of control. These are the topics used in chapter
4 to describe the Uruguayan and the American models:

1.​ ​Personal Production

2.​ ​Club Production
3.​ ​Production for the Wholesale Market
4.​ ​Product Control
5.​ ​Supply
6.​ ​Vendor and Outlet
7.​ ​Marketing
8.​ ​Harm Reduction

The topics Price and Tax will be treated separately in the next chapter, with the proper
justification. The points above will be analysed under the Best Practises Regulation
(2012), of the New Zealand government, described in 3.4. Regulatory Design. Only the
principle of Growth Supporting will not apply here, due to its aforementioned

42
particularities. It will, though, compose the analysis model for Price and Tax in the next
section. The principles used to evaluate the topics for regulation are:

1.​ ​Proportionality
2.​ ​Certainty
3.​ ​Flexibility
4.​ ​Durability
5.​ ​Transparency and Accountability
6.​ ​Capable Regulators
The analytical results to be presented as a model for cannabis regulation will be
displayed over the next eight coming sections.

43
5.1. Personal Production

Table IV: Personal Production

Personal Production

Proportionality Home-growing is likely to play a secondary role in a regulated

market. Most of production may come from other sources. This
should not be a highly regulated topic, though the number of
plants should be set in order to avoid leaking to the black
market

Certainty The number of allowed plants and the degree of enforcement

and punishment for potential offences should be clear

Flexibility Rules could be set and changed by the regulator, once is

necessary.
Rules on an ongoing experiment should be more flexible and
set by expert bodies rather than be stated in rigid legislature
under political pressure

Durability The duration of the rules should be reviewed once the

regulator concludes it is no longer appropriate

Transparency/ Since this is one of the main contact points of the legislation
Accountability with the users, the rules and the punishment for potential
offences on home-growing should be clear and widely
publicised

Capable The enforcement officials should be ready to deal with oversize

Regulators plantations, respecting the principle of proportionality in a
potential punishment. Once indoor production is hard to track,
the degree of enforcement should be proportional to its
benefits

General Comments The main goal of this regulation is to avoid that personal and
oversized production is diverted to the black market. It also
stresses the sense of cannabis as a plant rather than a

44
 poisoned substance to be supplied only by monopolistic and
ultra-regulated producers, being them state or private-run.
Some jurisdictions of the private-run model could be tempted
to forbid home-growing. This is a subject of potential lobby of
the rising cannabis industry to guarantee a market reserve for
the rising cannabis industry

45
2. Club Production

Table V: Club Production

Club Production

Proportionality Like Personal Production, it is likely to comprise only a minor

part of the overall market. Should not be highly regulated, while
more rules are needed to be set, once it comprises multiple
actors

Certainty Considering it involves more people and higher production, the

rules should be clear on how many plants will be allowed per
club or per member, the size of the club, how to share the
product and what to do with overproduction

Flexibility Could be defined by the executive regulator, since it should

leave an open door for evolving changes

Durability Rules should be updated once club members and the society,
through institutional channels, conclude that new regulation are
needed to be put in place

Transparency/ There should be a high level of information on how the clubs

Accountability work and how they are evaluated. Since there is a high risk of
social scrutiny, transparency is key to engage in dialogue with
the civil society

Capable It will demand a higher level of enforcement by the regulator.

Regulators Clear rules and data transparency will be the main regulatory
tools in this case

General Comments Once it comprises diverse actors, demands a higher level of

regulation and enforcement, and is under a wider risk of social
scrutiny, cannabis clubs are a source of production likely to be
avoided by the regulator who opts for a smaller bureaucracy.
The cultural environment must guide the rule setting in any
model. Cannabis club can be under high lobby risk-factor of
the rising industry. They can have a substantial share of the

46
 cannabis overall-market potentially, being in a state-led or
private-run model

47
5.3. Production for the Wholesale Market

Table VI: Production for the Wholesale Market

Production for the Wholesale Market

Proportionality Has the biggest share of the overall market. Likely to be highly
regulated. Rules on production ownership range from quotas to
licensing. Rules could delimit producing land. A main issue is if
production should be pre-fixed and under what terms

Certainty In either model of governance rules should be clear to avoid

corruption and leaking to the illegal market, as well as to give a
strong mandate of enforcement to the regulator

Flexibility While it must leave an open door for evolving changes, rules
should be clearly stated in the piece of legislation

Durability It should last as long as it provides the solutions for the

regulated subject. However, this is a key point of cannabis
regulation and any change could impact the whole system of
control

Transparency/ The process of licensing and evaluation must be highly

Accountability publicised to guarantee the regulation trust

Capable Well-equipped regulators to deal with the enforcement of a key

Regulators point of a profitable and impacting market

General Comments This is likely to be the most important rule of cannabis

regulation. It should be designed according to the local model
of governance and the regulation goals. Could work as a
valuable political instrument, since the grantees of production
licenses may become important actors in the process. In
state-led Uruguay’s model production was put under Military
supervision. In private-run US vendors are partially allow to
produce and self-supply themselves. Either governance model
is taken, producing licences could be granted, for example, to
pre-existing areas of production as a tool of local development

48
5.4. Product Control

Table VII: Product Control

Product Control

Proportionality Rules should be proportional to the enforcement ability and to

the harms risk. Private-run models tend to allow
cannabis-based products, what will increase the demand for
control. Less variety of products and potency means lower
demand of bureaucracy

Certainty Rules about potency and variety should be clear. Choices for a
more varied offer in terms of products and potency defines the
nature of the model, whether it is highly profit-making oriented
or not

Flexibility Expert bodies should supervise the risks of offered substances

and update rules if necessary. Fundamental regulation,
though, should be clear and bold

Durability Rules could be changed by regulators if appropriated.

Transparency/ Expert reports and the reasons for rules changing should be
Accountability highly publicised

Capable Regulators should be equipped with expert bodies to set

Regulators fundamental regulation, with scientific support, to enforce
regulation

General Comments In an experimental policy, a low ambitious offer of products and

high control of what has been offered seems to be a
reasonable approach in the first stage. Regulation should be
clear to avoid abuse and harmful side-effects, but should be
flexible enough to cope with evolving changes

49
5.5. Supply

Table VIII: Supply

Supply

Proportionality In Uruguay the state has the supply monopoly, its main tool to
control the system. In the private-run model, producers supply
outlets with no majo regulatory concerns

Certainty Once this is a pivotal topic in the regulatory process, there

should be certainty of the rule effect and the institutional design
should be clear

Flexibility Rules should change anytime they prove to be ineffective. But

key rules of a regulation, such as this, should be deeply
analysed before being put on a piece of legislation. Low level
of flexibility

Durability The assurance regarding some key rules defines the durability
of the whole regulatory system

Transparency/ Information regarding volume supplied and related data should

Accountability be available in public domain

Capable Equipped regulators with bold mandate

Regulators

General Comments A well designed chain of supply is key to define a good system
of regulation, whether in a state-led of private run model of
governance.

5.6. Vendor and Outlet

50
Table IX: Vendor and Outlet

Vendor and Outlet

Proportionality This is the contact point between product and client. Rules
should be detailed, feasible and enforceable. In a private-run
model, regulation cannot suffocate companies by making the
system ineffective

Certainty This is an area highly exposed to litigation. There is no room

for doubt regarding the commerce of cannabis to a wider
public.

Flexibility The structural rules demand a stronger mandate and should be

set in the legislation. There should be room for the regulatory
agency set minor changes in the daily activity

Durability This is a set of rules that define the whole model of cannabis
regulation. Main rules are not supposed to change drastically.
But in case of policy failure, they should be reviewed
accordingly

Transparency/ High level of transparency and publicity of the rules are

Accountability necessary. Customer services and communication channels
with the civil society highly recommended

Capable This is where the regulator will put under heavier scrutiny. It
Regulators should have recognised expertise and a strong mandate. The
regulator must ensure there will be a fair delivery of services
and that the regulation goals will be achieved

General Comments Purchase restrictions are a key issue in this point of the
regulation process. Vendors should be trained to deal with the
regulations and there should wide access to the rules. The
selling points should work as a channel of information,
especially regarding harm reduction. The wholesale point
activity should have clear rules to enforce certainty to the
responsible - which is fundamental in the private-run model to

51
 assure financial and judicial guarantees

5.7. Marketing

Table X: Marketing

Marketing

Proportionality Cannabis is a drug and marketing of a substance which could

cause harm should follow the lessons of tobacco and alcohol
industries. So far, no regulation model allowed marketing and
that seems to be the path ahead

Certainty There is a consensus in the regulation models that marketing

of cannabis should be avoided and there should be no doubts
left about the decision

Flexibility The trends of alcohol and tobacco industry is to ban marketing

overall. There is currently no much room to reverse this trend
in cannabis market as well

Durability As long as there is wide trust in the rules efficiency

Transparency/ The reasons to avoid marketing should be of publicised

Accountability

Capable Once there is a general ban and one single rule, there is a low
Regulators level of enforcement. Regulators should be ready to enforce
law if needed

General Comments The current cannabis models of regulation follow the lessons of
alcohol and tobacco industry and there is a consensus that any
sort of marketing should be allowed. Exceptions may apply for
labels information in the case of cannabis based products to be

52
 sold in privately-run systems

5.8. Harm Reduction

Table XI: Harm Reduction

Harm Reduction

Proportionality Cannabis is a drug that can have health impact and any
regulation should guide itself having that as an assumption.
Rules should guarantee assured investment in education and
harm reduction policies

Certainty The approach towards harm reduction should be clear and

constantly assessed by experts with clear mandate. Rules on
how to fund programs must be clear

Flexibility Harm reduction is the scientific understanding of psychotropic

substances effects in drug users. The rules should be flexible
enough to deal with evolving understandings

Durability Should last as long as there is wide trust in the rules efficiency

Transparency/ The scientific approaches under a public health perspective

Accountability should be clear to the wide public. The regulator should be in
constant dialogue with independent experts for policy
assessment

Capable There should be an equipped regulator with strong mandate to

Regulators assure that even morally controversial policies of public health
do not succumb to inadequate political pressure

General Comments Harm reduction is a clear health system face of the drug
problem. The use of drugs is still surrounded by social stigma
and for decades the mantra was to avoid and ban drugs at all.

53
 Harm reduction means the recognition that drugs consumption
is a given reality and the society should have the right
information to deal with it. The regulator should have a strong
mandate to resist non-scientific lobby. Once cannabis
regulation generates revenue, there should be clear rules on
how to promote educational campaigns and other harm
reduction policies

Chapter 6
How much? - Price and Taxation

The current state of regulation, the prohibitionism, means that prices are regulated in
the illegal market under the balance of supply and demand, with no state intervention,
such as tax or any sort of fees. In a regulated market, the price will play a crucial role in
the policy process and could define either its success or failure. This chapter will
present some issues of welfare economics before introducing a model for price and
taxation of cannabis market, similar to the one presented in the previous chapter.

Be in a state-led or in a private-run model, prices will be defined after some degree of

state intervention. State-led models, which partially control the supply chain, could be
price-makers, depending on the degree of intervention. In private-run models, in spite of
the control, the flow between supply and demand may push prices up or down, while
they will not freely fluctuate. In a regulated system of governance, prices will be
impacted by the level of taxation levied by the authorities.

The main challenges are to measure the impact of the changing-prices and how they
can affect the patterns and levels of use. After that, one must reach a balance among

54
the goals of price-definition: (1) it must avoid any sort of incentive for abusive use,
leading to a consumption increase (due to health-issues), (2) discourage the use of
other drugs, (3) reduce the black market (since it sounds unrealistic annihilating it) and,
at the end of the day, (4) generate revenue (Rolles and Murking, 2013, p. 72). Price is,
then, one of the main tool, it not the most important, of regulation in cannabis markets.

6.1. Price

Price is the monetary measure of value created and transferred in the trade of goods
and services between different agents. In the classical theory of Adam Smith, the value
of a specific good or service is defined by the scarcity of the resources that compose it
and the intensity of labour used to extract, produce or deliver this good or service. Later,
scholars such as Leon Walras defined value based on the marginal utility, rather than
labour. For them, price is directly related to the marginal utility, which ​is the additional
satisfaction gained by a consumer after having one more unit of certain good or service.
Prices will ​increase or decrease according to the marginal utility variation, in the same
direction (Weber, 2012, p. 3).

In a perfect economy, with fully and properly working competitiveness, market prices
should reflect both the marginal cost of production (the cost of any additional unit) of the
traded goods as well as the marginal value (or utility) for consumers. However, perfect
markets are a rarity and prices tend to be imperfect, impacted by a series of
imperfections, like monopoly and externalities. They do not necessarily reflect the
marginal social costs and benefits. There is, then, the need of a process of prices
adjustment. One of the tools to change prices is state intervention through monopoly of
taxation (Rosen and Gayen, 2010, pp. 46-47).

6.2. Cannabis price

55
Prices of cannabis are likely to fall substantially in a regulated market due to its low
production cost prices. In a market where prices are elastic, it means that price
decreases will lead to an increase of consumption. However, so far there are no
conclusive investigations to point out if cannabis has an elastic demand response and
that, probably, must vary according to cultural circumstances (Rolles and Murking,
2013, p. 72). There is another

Kleiman stresses the possibility of cannabis being a good that generates consumer
surplus, which means an extra challenge on regulation and price setting (1995, p 474).
The consumer surplus is the amount of resources consumers are willing to pay to have
access to certain good or service, even when these prices exceeds their final costs in
the market, the price that they are ought to pay, actually. In other words, even if some
externality or state intervention decreases the price of that good or service, consumers
would not care paying more for that (Rosen and Gayen, 2010, p, 164).

The matter relies on the cost of productions of cannabis and their selling costs in a
non-legalised market, under prohibitionism. There is a big gap that should narrow
dramatically in case of regulation, before tax. Caulkins (2015, p. 19) collected
multiple-source, like the UN World Drug Report, to show how the current regime of
prohibition inflates prices, generating a profitable black market where many suppliers
will conclude that it is worth to take the risk of facing a criminal offence. Cannabis resin
can be bought by US$ 0.30 in Morocco (serving size of 0.4g), being sold for US$ 3.44 in
the Netherlands- an increase of 1047%.

If the initial goal of the prohibition was to hit and annihilate the market, the figures show
that it got strengthened, instead. Pricing in a regulated market will be a key factor to
dismantle the old model while securing healthy levels of access to the new licit drug.

6.3. Taxation

56
The main challenge at setting up the right amount of state intervention to define the
price of cannabis is to balance the need of dissuading both the consumption increase
and the black market (Rolles and Murking, 2013, p. 80).

But when comes to define an optimum price for cannabis, the social costs must be
included. Cannabis is a highly-cost effective intoxicant. Kleiman and Ziskind (2014, p.
80) use two variables, price and drug-effect, to make a comparison between a person
with low-level of tolerance who drinks alcohol and another who smokes cannabis. They
argue that US$ 5 is enough to get drunk with a supermarket beer purchase, while only
US$ 2 of cannabis is enough to make someone high, having as reference the current
prices in the black market. Considering the current inflated prices that would drop
dramatically in a regulated market before taxes, they advocate that the health threats
cannabis represent should be an argument to keep the prices as they are today. In
other words, cannabis should not be cheaper, to avoid the risks of self-harming
consumption.

Another concern is cannabis’ relationship with other legal and illegal drugs, like tobacco,
alcohol and cocaine. So far, there are no accurate results on the issue of if cannabis
would be a complement or substitute good to any of them, as aforementioned in chapter
5. Since regulation means entering in an unknown territory with few highly predictable
variables, the process should be taken a cautious course.

To keep the current prices a high level of taxation would be required. This level could
reach up to 95% of the final price, considering the price measures made by Kleiman
and Ziskind (2014). If the private-run model is chosen, one must regulate it in order to
avoid monopolist or oligopolist markets, as seen in the tobacco and alcohol industry.
There could be some regulation to limit the product innovation, which is good in other

57
markets but must be taken cautiously in this case (Kleiman and Ziskind, 2014, pp.
79-81).

Rolles and Murking (2013, p. 79) stress, nevertheless, that realism is necessary. The
black market will not disappear completely and will remain to some extent. In this case,
it is worth to take another lesson of the tobacco industry, which shows that the higher is
the level of taxation the higher is the incentive for smuggling. The best regulation is,
therefore, that which solves a problem without generating others.

6.4. Models for Price Control

Rolles and Murking (2013, p. 79) listed 5 categories of control to regulate cannabis
prices. They can be used in both a state-led or in a private-run model. The tax collection
can take place in different stages, being production, retails or sales. More than one
regime can be used at the same time in the different stages of the chain. In this model
we are going to use 4 categories, living aside Differential Pricing, once this is only a
combination of the other different regimes.

1. Direct Price Fixing: the government decides the price (with or without tax)
​

applicable to a given amount;

2. M
​ aximum and/or Minimum Price: prices fluctuates between parameters set by

the government, up and/or down;

3.​ ​Fixed Per Unit Tax:​ imposed on a given amount of the product, like per gram;
4.​ ​Percentage Sales Tax:​ tax levied on the products sale, VAT type.

In this section, we will apply in the price control categories the Best Practises of
Regulation (2012), as done in chapter 5. Here, however, we will also apply the principle
of ​Growth Supporting​, in the terms defined in 3.6. While aspects such as production,
supply and outlet and vendor have a close relation to economic growth, it is the price

58
and the taxation which really defines the economic goals of the cannabis market. There
could be a set of rules for all these aspects in a state-led model, for example, with
chains of production and supply well established, without any major concern with profits,
revenues and growth.

The next two table show the model of regulation for price control. The first one will
follow the six principles used in chapter 5 while the second will just focus on Growth
Supporting.

Table XII: Model of Price Control 1

Direct Maximum / Fixed Per Percentage

Price Fixing Minimum Unit Tax Sales Tax
Price

Proportionality In any regime, the amount of taxation should reconcile the needs
of dismantling the black market while keeping public health as a
guideline for regulation. Depending on the governance model,
revenue could be another point to consider

Certainty Whatever regime of price control, there should be certainty of the

rules and certainty of what they will achieve and the effects they
will cause

Flexibility The price regime is a key part of the regulation and should be in
the legislation. But once the regulator concludes it is time for
change, that should not be a barrier that can’t be crossed

Durability It should last as long as it makes the regulatory system achieves

its goals

59
 Transparency/ Any regime of taxation or price control should be extremely
Accountability transparent and accountable in order to not disrupt the economy
and harm the economical agents

Capable Crucial to enforce the rules and to prevent any sort of disruption in
Regulators the system due to implementation failure. The different regimes
will pose different levels of enforcement challenges. Taxing
production, for example, may be easier than taxing sales

Table XIII: Model of Price Control 2

Direct Maximum / Fixed Per Percentage

Price Fixing Minimum Unit Tax Sales Tax
Price

Growth If fixed prices Less intrusive While the The most

Supporting give a that Direct government suitable to
substantial Price Fixing, imposes tax in support
margin of profit but still very every traded growth. The
for the controled by product, the highest the
economic the fact that it is sales, the
agents (be government. not fixed give highest the
government or The level of more autonomy revenue will
private), there intervention will to the be. Even when
should be depend on the economic there is a
room for difference agents, making heavy burden
growth, while between the it more suitable of taxation, this
prices will be price ceiling to support category gives
distorted by and price floor growth than the more
market failures with the market previous two. autonomy to

60
 such as prices. There are the economic
monopoly. Incentives to debates on if agents
Limited entry market entry taxation should
incentive will depend on be imposed per
the certainty of unit of THC, to
the ceiling and control the
floor as well as potency. This
the frequency mode presents
of price logistical
changing challenges,
though, since it
requires more
sophisticated
mechanisms of
product control
to enforce the
law

Chapter 7
Conclusion

There is no full recipe on how to regulate cannabis. First of all, the matter of regulating
cannabis arose due to a bunch of problems related to drug-trafficking, police
enforcement, and deterioration of human rights, health issues and institutional and
geopolitical threats. This dissertation has as an assumption that much of these
problems only get worse with the current regime of prohibition. And it supports the full
regulation of cannabis as a mean to achieve better records in all the aforementioned
topics.

61
However, as said by Rolles and Murking (201, p. 26), there is “no silver bullet” to tackle
the drugs problem. Regulation will not eliminate crime, black market and all
drugs-related problems. A new regulatory system will not generate a “harm-free world”.
The approach should be realistic, especially given the unrealistic policies historically
taken. Reducing the harm caused by the current drugs should be the main goal. If it is
successful, it means that the regulatory system is functional.

Responding to the question posed by this dissertation, if there should be an optimum

level of the regulation, the first conclusion is that there is not. The concept of optimum
means a point of equilibrium prone to generate a perfect influx in a given market. It will
not happen in the cannabis market. Firstly because it will be a big and diverse market
likely to be sourced with some degree of illegal supply. Secondly, given the low
production costs and the high level of regulation which must keep prices in a high level,
the market prices would be way distorted if compared to prices from a perfect
competition scheme.

The problem to be solved is what degree and what sort of regulation works better in a
given environment with its own political, social, economic and cultural context.

This dissertation analysed the current cases of full cannabis regulation and could
categorised it under two models of governance, the state-led (represented by Uruguay)
and the private-run (in the US). The definition of the institutional design is the start-point
of the regulatory system and will impact it overall. Kleiman and Ziskind (2014, p. 77)
insist that there should not be any solid truth in the regulation process. Due to all
uncertainties, the full regulation of cannabis should be tried in an “experiment spirit”.
They stress the importance of flexibility to give-quick responses and easy-adjustments
“in light of experience”. Finding a perfect model of regulation at this initial point is a task
with almost zero chance of success, they argue.

62
In both cases, despite their governance models, the points to be tackled are the same:
(1) dismantling the black market; (2) decreasing criminality and violence; (3) avoiding
over consumption and health-related problems; (4) improving the state of human rights,
civil liberties and democratic institutions; and (5) increasing the public revenue. These
are the goals listed in 3.5. Both analysed models provided answers to the topics above
to some extent.

The set of rules which will provide the best answers to the posed challenges in a given
environment is what we could consider the best legal framework, the institutional design
closest to what we called “optimum level of regulation”. In order to address the question
this dissertation used the Best Practise Regulation Model (2012) of the New Zealand
government. It provided valuable tools to analyse the current regimes in course and to
define a model to guide a regulatory framework for cannabis market.

The model described in chapter 5 and 6 aims not to be a definitive answer to cannabis
regulation. It sets out to be a guide for a regulatory designing process, in any system of
governance. Since regulation is an actual cost-benefit exercise, it poses the questions
to be weighed and how to best addresses the trade-offs.

The main trade-off lies on how to define the balance between business revenues and
health-consequences. If governments opt for a highly business-oriented model, they
can replicate the problems generated by the powerful alcohol and tobacco industries. If
they ban any sort of profit-making aspect and imposes a highly strict regulation, they
can go for the same dysfunctional route of the prohibitionism, which lacks realism and
abounds authoritarianism. The role that the state and the private sector will play in the
regulatory framework will be of high impact in any choice made.

Another important question which has not been discussed in this dissertation but will
demand a more in depth approach as the debate on cannabis regulation evolves is the

63
extension of the supply chain and the transnational trade. So far, the experiments on full
regulation have a local character - be in the case of small Uruguay or in the state-level
cases of the US. The debate on regulation tends to recommend that the question is
addressed in a local level, but that could change and, if so, create a dynamic and
uncertain international market.

The focus on local chain of supply and the coexistence of home-growing and
cannabis-clubs also impacts the economics of cannabis. Perhaps we have been
witnessing the creation of a more sustainable industry. The lack or the low-level of
branding, the ban on marketing, the possibility of growing a product at home or get it
from a shared and cooperative source seem to indicate that industry of cannabis shall
not have the same destiny as the one of alcohol and tobacco.

It is early to make any further predictions on how the regulatory framework will evolve.
But it is very likely that the current international drug system will be under heavy scrutiny
over the coming years and cannabis regulation must be one of big debates ahead.
There will be a time when the current UN treaties on drugs, especially its unrealistic
goals, will be reviewed, as well as its unrealistic goals. Rules take time to change, as do
social stigma. That is why it is important to debate such an important issue with
methodology. The cases listed here will certainly shed light on how to define a new
international drug system, when comes its time.

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