Drug use in the State of Michigan is seen as a major problem, with treatment admissions in the State for various illicit drug uses increasing during the last decade. Currently, an estimated 71 percent of males and 74 percent of females in Michigan’s criminal justice system have been assessed as having a substance abuse or dependency problem. The purpose of this report is to provide comprehensive information on the extent and cost of the drug problem in the State of Michigan, as well as analyze the effectiveness and cost efficiency of the State’s drug policies. Specific questions are posed with findings presented examining the economic effects of Michigan’s drug policies from 1980 to the present: (1) how have the convictions and prison commitments for drug violations and parole violations changed since 1980 and how has the frequency of treatment in institutions changed; (2) how serious is the drug use problem; (3) how do the costs of incarcerating individuals convicted of drug offenses compare to the costs of providing drug treatment to offenders; and (4) how much money could be saved by diverting 50 percent of those currently incarcerated for drug offenses to residential treatment? The report findings suggest that Michigan would benefit from adopting more effective and cost efficient ways in dealing with the problem of substance abuse. It is suggested that due to the cost effectiveness of treatment and the State’s strained fiscal situation, probation and parole violators should be considered for diversion from prison into treatment. Figures