The New Zealand Institute of Economic Research says the Government needs to devise a policy which decriminalises but heavily taxes cannabis use.
Principal economist Peter Wilson says this would help reduce the harm of marijuana use, all the while opening opportunities for researchers to develop the medical use of the substance.
"We definitely think there are five things that have to happen - decriminalisation is one, a heavy tax is the second, regulation of the product to make sure it's safe, educate people so they make informed choices, and then monitor use and effects."
Mr Wilson says New Zealand shouldn't follow the route of some US states, which have veered away from harm reduction.
"The United States have gone the whole hog and decriminalised all the way, but they haven't put in heavy taxes. Using tax to reduce demand would be quite novel, but we think quite effective at the same time."
He adds that doesn't mean to say the use of marijuana should be encouraged.
"The one thing that this regime would require, is you would have to be confident people in New Zealand could understand the message that legal does not mean safe."
A California cop who recently visited New Zealand said decriminalisation would be a mistake, and has led to people doing crack cocaine in the streets in San Francisco.