What happens when something that people want is made illegal?
1. The supply drops more than the demand, so the price goes up. (Indeed, drug demand has increased enormously under prohibition.)
2. Forcing the illegal product underground garbles the flow of information necessary to an efficient market. Without an efficient market, there is less price competition.
3. Lacking competition, dealers charge monopoly prices, and profit margins widen.
4. The big profits draw in people who would not otherwise break the law, spreading corruption among the police and disdain for the law among otherwise law-abiding citizens. (Of course, big profit margins also attract people who are very experienced at breaking the law. See item #6.)
5. Supply becomes conspicuous, marketing becomes more aggressive, the price falls, and demand rises, drawing the attention of the forces that got the substance outlawed in the first place.
6. The law cracks down on the supply, driving the amateurs out of business and leaving organized crime in control, now with even higher profit margins and with connections to corrupt law enforcement. At this point the illegal market has attracted the people capable of making it an institution, including some who wear badges. Henceforth it will be all but impossible to eliminate the suppliers. Greater enforcement can shake out the less skilled or the less daring but merely raises incentives for those who remain.
UPDATE from Nate Silver at FiveThirtyEight:
