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How Should State and Local Governments Respond to Illegal Retail Cannabis?

American Enterprise Institute

January 31, 2024

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  • The legalization of cannabis, rather than sidelining the black market, has fueled it, providing cover to illicit cannabis enterprises that often undercut the legal market on price and accessibility.
  • State policies, such as high or complex cannabis taxes, scant issuance of licenses for legal operation, and widespread local “opt-outs,” play a key role in keeping the legal market from outcompeting illegal alternatives.
  • The treatment of alcohol and cigarettes may be better models: States should allow legal retail to proliferate to minimize the advantages illicit operators now enjoy.
  • At the same time, as with tobacco, public health authorities should mount education campaigns to minimize marijuana use, in light of its demonstrated dangers.


Legal cannabis has become a fact of life in much of the United States. The District of Columbia and 24 states now permit the sale of recreational marijuana; they, and 14 additional states, also permit marijuana sale for supposedly medical purposes. Of course, the Food and Drug Administration has not actually approved marijuana for treating any disease; in fact, the Controlled Substances Act classifies marijuana as a Schedule 1 drug “with no currently accepted medical use and a high potential for abuse.”1 Legalization was largely prompted by the reality that millions of Americans purchased and used marijuana illegally. The imprisonment of marijuana consumers is now widely viewed as disproportionate or even unjust.

Legal cannabis was meant to address both aspects of the situation—to recognize cannabis use as an individual choice for adults, similar to alcohol and tobacco use, and replace the illicit market with a legal and regulated one, sidelining criminal activity and ensuring the sale of unadulterated cannabis products.

That legalization process has not, however, gone according to plan. States require licenses for legal sale while releasing a limited number of them. Local option laws permit municipalities to prohibit cannabis sale in their jurisdictions; in New York and California, cannabis sales are still illegal in most localities. State taxes, set high to raise substantial state revenue, have pushed up legal retailers’ prices, making them more expensive than their illegal competitors. Thus, the black market for cannabis products—not only “flower,” the smokable cannabis plant, but also cannabis-infused edible goods, tinctures, oils, and more—has continued and grown.

In New York City, as of November 2023, just 25 legal licensees, the first of which opened a full two years after cannabis was legalized, competed with an estimated 1,500 unlicensed sellers, many of them corner-store bodegas augmenting their revenue with illegal pot sales.2 In California, about two-thirds of marijuana purchases are in the black market.3

Legalization makes it harder for police to distinguish illegal growers and traffickers from legal enterprises and easier for storefronts to hide in plain sight by pretending to be licensed businesses. It also encourages consumers to think the marijuana products they purchase are standardized and therefore safer than they actually are.4 Broadly, the proliferating black-market cultivation, distribution, and sale of cannabis threatens to undermine the rule of and respect for law and public order, an especially acute problem in major cities where demand is concentrated.

This report explores policy and law enforcement alternatives for bringing legal order to the cannabis market. To do so, it draws a historical comparison between the modern day and the period beginning in 1933 after the end of the prohibition of alcohol. Prohibition began in 1918 and featured an extensive black market of bootleggers and speakeasies—similar to today’s illegal producers and retailers. Post-Prohibition, states and localities adopted a range of approaches that over time marginalized the illegal market.

This report explores applying such approaches to the cannabis market. It also explores the parallel between the cannabis market and the legal market for tobacco products. The approaches discussed below range from a crackdown on black-market cannabis to a sharp increase in the number of outlets for legal sale.

Read the full report.


  1. US Department of Justice, Drug Enforcement Administration, “Drug Scheduling,”
  2. Louis Finley, “NY to Lose Millions in Cannabis Tax Revenue Due to Illegal Market,” Spectrum News, June 22, 2023,; and New York State, “Governor Hochul Announces First Adult-Use Cannabis Retail Sales Made in New York State History,” press release, December 29, 2022,
  3. Geoff Lawrence, The Impact of California Cannabis Taxes on the Participation Within the Legal Market, Reason Foundation, May 2022, 16,
  4. KUNC, “Seven Years After Legalization, Colorado Battles an Illegal Marijuana Market,” August 14, 2019,; and Shira Schoenberg, “Black Market May Be Marijuana Legalization’s Biggest Challenge,” CommonWealth Beacon, November 29, 2020,