Yours is a very sane and rational approach. Some state like Texas should try it. There may be better ones, and there are certainly worse ones that sound good on paper. Other states should try those. States who pick rational leaders will migrate towards the policies that work better over time.
Oh, wait, the fedgov runs the War on Drugs. Sorry, we can’t try your approach. And besides, anyone who wants to is a drug-addled hippie Ron Paul libertarian nutjob. /last sentence is SARC
Sanity is not a common commodity in this area... What I am proposing would probably eliminate 80% of all urban crime in North America within two years. You might also want to look around post 75 or thereabouts, somebody noted several of the real world things which drive the drug war including prison worker unions. The thing would be hard to dismantle at this juncture but it needs to be done.