Non-observed economy and public finance: the impact of legal drug market

Prohibitionist policies on drugs failed to reduce their use, which grew in recent years in all countries. Despite law enforcement activities, the proceeds of the drug market for criminal organizations remain very high worldwide. The regulation of this market would result in substantial advantages in terms of costs and benefits for the community because of the emergence of illegal transactions. In fact, these transactions could be recorded in the official GDP, with significant effects in terms of budget and performance indicators of financial stability. The model presented in this paper has tried to systematize the costs and benefits of regularization highlighting the impact for the community. To the variables considered by the previous literature, we have added economic and financial aspects of the drug market in the official GDP. This approach could be extended to other parts of the economy with similar characteristics, with a significant effect in terms of budget and performance indicators of financial stability.