Cannabis legalisation and tax revenue: a forecasting simulation for Italy

This chapter provides a quantitative assessment of the potential fiscal impact of cannabis legalisation in Italy, combining international evidence with a parametric forecasting model calibrated on national consumption data. The analysis contributes to the literature on public economics and regulated markets by estimating the tax revenue effects of alternative tax structures, taking into account demand elasticity, cross-price substitution between legal and illicit markets, and the degree of emergence from the underground economy. The empirical framework is based on objective consumption estimates derived from wastewater analysis for the period 2011–2022, integrated with official price data. Building on the model originally developed by David and Ofria (2013), the study specifies a revenue function in which taxable consumption depends jointly on the legal price, the tax rate, own-price elasticity of demand (ε = –0.3; –0.6), and a parameter m capturing the share of consumption shifting from the illicit to the regulated market. An extended specification also incorporates cross-price elasticity effects, allowing for imperfect substitutability between legal and illegal channels. Simulation results show that a tax rate analogous to tobacco taxation (75%) would likely overestimate achievable revenue due to demand contraction and persistence of the black market. The model instead identifies an optimal tax rate of approximately 58%, consistent with Laffer-curve dynamics in regulated markets and international benchmarks. Under competitive pricing conditions (legal price around €6 per dose) and realistic emergence rates (m between 0.75 and 1), estimated annual tax revenue ranges between €8 and €12 billion for recent years, while preserving the competitiveness of the legal market relative to illicit supply. The findings highlight the importance of tax design in balancing revenue maximisation with market-transition objectives. Excessive taxation risks sustaining underground activity, whereas a calibrated fiscal structure can simultaneously generate significant public revenue, reduce enforcement costs, and foster gradual formalisation of the market. The analysis thus provides an evidence-based framework for evaluating cannabis regulation within a broader perspective of optimal taxation, underground economy dynamics, and policy design.