Legalising cannabis could help the government cut the deficit by up to £1.25 billion a year, according to a new report.
The study by the Institute of Social and Economic Research is believed to be the first to put a figure on how much money the government would be likely to gain by allowing marijuana to be sold in a regulated market.
It states that legalisation could save the government £200-£300 million a year in policing, justice, and drug treatment costs.
Tax from licensing sale of the drug could swell government coffers by £0.4 billion and £0.9 billion a year claims the report, co-authored by Stephen Pudney, professor of economics at the University of Essex.
Professor David Nutt, director of the neuropsychopharmacology unit at Imperial College, London, and former chairman of the Advisory Council on the Misuse of Drugs, told the Observer that the report showed current government policy to be misguided.
"The costs of the current punitive approaches to cannabis control are massively disproportionate to the harms of the drug, and shows that more sensible approaches would provide significant financial benefits to the UK as well as reducing social exclusion and injustice", he said.
The increased revenue could help the government reduce the deficit by £0.9 to £1.25 billion a year, the report said.
The authors also argue that the dangers of cannabis as a 'gateway' drug, which leads users to try harder drugs, is greatly exaggerated in public discussion.
They also concluded that legalising marijuana would lead to a massive boost in consumption of the drug, as it would lower its price, and increase its availability.
Campaigners for drugs policy reform welcomed the report.
Amanda Feilding, director of the Beckley Foundation, which campaigns for scientifically-based reform of drugs policies and commissioned the study said that legally prohibiting the sale of marijuana was financially wasteful.
"In these times of economic crisis, it is essential to examine the possibilities of more cost-effective drug policy.
"Our present policies based on prohibition have proved to be a failure at every level. Users are not protected, it puts one of the biggest industries in the world in the hands of criminal cartels, it criminalises millions of users, casting a shadow over their future, and it creates violence and instability, particularly in producer and transit countries."
The authors said they had taken into account in arriving at their conclusions that legalisation would entail the government spending more on regulating the sale of the drug and on public health promotion.
Pudney said that the study should not be taken as the final word on the effect of legalisation on public finances, but did show the factors that would need to be taken into account if such a policy was to be introduced.