Starting in the 1970s, the Netherlands developed a regulatory regime for narcotic drugs by distinguishing between hashish and marihuana (“soft drugs”) and other drugs (“hard drugs”). The authorities decided to cease prosecuting the possession of consumer quantities of the former type and to allow the sale of soft drugs at “coffee shops”. However, they did little to control the activities of coffee shop operators, whereas the supply of soft drugs to the shops remained illegal. In this paper, we review the ongoing debate on the soft drug policy in the Netherlands and analyze it from the perspective of the regulation of illegal markets.