Pricing Canadian Cannabis

Based on the article Heres How much you might be paying for legal weed by Rachel Browne
Vice Media. November 1, 2016.
Cluster 3 | Cohort G | Learning Team 3
Giselle Aris, Abhishek Asthana, Roy Ben-Ami, Blair Gillespie, Sid Menon, Christina Theodore

Pricing Canadian Cannabis

What does the marijuana market look like today?
In most markets across the world, including Canada, there is an illicit market for marijuana.
Farmers grow weed and sell it in the black market to consumers. As there is only the black
market right now, the market looks like a typical competitive market, with an equilibrium at a
given price and quantity. Like any crop, there are better and worse seasons causing variable
supply. With these fluctuations in supply come changes in price and quantity to reach a new
equilibrium.
NOTE from XTINA: I think these graphs need to be slides - I can make them all into PPT
format at the end if helpful.
{insent simple supply and demand graph showing what happens when supply goes up}
Abhishek
What happens when marijuana is legalized?
If Canada passes legislation to legalize marijuana, then there will be two separate markets for
the drug, as the black market will not disappear. Demand for marijuana will increase when it is
legalized, but this increase will not all necessarily go into the legal market. The black market will
still exist with its own supply and thus its own equilibrium. In theory, despite there being two
markets, the prices should be similar as their are similar costs involved and the farmers are
looking for profit. However, given that the
{Depict graph of side-by-side markets} Christina
What happens when the government taxes marijuana?
Making a drug legal and taxing it, especially when there is already a large black market for it,
will almost certainly raise the price. The trick is to tax it in such a way where the increase in
price doesn't wipe out the convenience and low risk of buying it legally. Even after marijuana is
legalized, there will still always be a black market for it, especially if laws are written in such a
way as to give corporations a leg up.
Much of the pro-marijuana legalization legislation in the United States is written with big
corporations in mind. There are some hints in the Vice article that this is happening in Canada,
too. There is a good chance that if weed is ever made legal at the Federal level, small
businesses that deal in marijuana will get crushed by large corporations, whose involvement in
the industry will have been favored by the laws they have heavily lobbied for. We have already
seen that happening in the ballot measures in a few states during the most recent US election.
The corporatization of recreational marijuana could lead to it becoming a massive industry
requiring expensive permits and thus large economies of scale, essentially eliminating small
competitors and turning weed from an art where growers and small business people innovate
new strains and creative edibles into a collection of pre-packaged options like "Marlboro

Greens" and additive and high fructose corn syrup-filled "Stoner Snickers Bars." Such legislation
might also keep growing at home illegal, meaning if you want marijuana, you have to patronize
a huge corporation and buy its focus-grouped products. It's also notable that one of the biggest
sources of funding for advertising against legalized marijuana is the alcohol industry, since the
belief is that they'll lose market share if there's another legal drug on the market.
If there's one truth about drug policy, it's that prohibition does not produce a desired or ideal
outcome. Even in countries like Saudi Arabia and Indonesia, who threaten drug users and
traffickers with death, there is still a healthy market for illegal drugs. In the Philippines,
President Duterte is actually encouraging extra judicial killings of drugs dealers and drug users,
and yet the average person can still find a joint or a bump in Davao or Manila. So if Canada
wants to reduce the number of kids who use cannabis recreationally, placing heavy handed
restrictions is not likely to work, especially when the penalties are not significant. Colorado has
seen the number of young users of marijuana drop after legalization; it may be that in Western
societies, the less illicit a relatively harmless drug like cannabis is, the less interest there is in
consuming it. Heavy-handed restrictions will make it more tempting to young people, not less.
Drug education that doesn't include fear mongering, along with harm-reduction policies across
the board, is more likely to produce a closer-to-ideal outcome--so hopefully Canada goes that
route.
The tax effects on demand can be seen in the graphs below, holding supply constant in both
markets. When tax is added to the legal market, price will rise and equilibrium quantity will fall.
In the black market, demand will shift outward and equilibrium quantity and price will rise since
there is no tax in place.

What is our suggestion for Canada going forward

Going forward and while legalizing marijuana, Canada should tax it in a manner that will raise
substantial tax revenue while retaining demand levels in the black market at a minimum.
Canada should tax marijuana in the same manner that it taxes cigarettes. This would have a
legitimacy from both an economic/financial standpoint, as well as a legal standpoint. The current

tobacco federal tax in Canada is $21.03 and the provincial tobacco sales tax ranges from $29.8$59, per 200 cigarettes. This results in total excise tax of roughly $50-$80 per 200 cigarettes
($8.5-$12 per pack). Marijuana should be taxed in a similar manner, equating 200 cigarettes to
about a pound of marijuana.
In Colorado marijuana is taxed at $23 per pound of marijuana (federal tax) and at 15% tax rate
(state tax). In Washington theres roughly a 44% effective tax rate. A mature marijuana market in
the US could generate up to $28 billion in annual revenue, based on these tax structures.
Canada should implement a similar tax structure, based on its tobacco tax rates. As a full-scale
legal marijuana market would be new in Canada, the government will have to initially implement
a tax structure that is familiar and revisit it occasionally. The Canadian government would also
have to check the demand levels in the black market in order to make sure that those are kept
at a minimum, and if not, it would have to calibrate the tax structure in order to incentivise legal
purchases of the drug.

Other
Prohibition at the Federal level can have other weird unintended consequences, especially
when there are inconsistent laws. Because of Federal laws aimed at drug enforcement, states
that have legalized recreational marijuana have seen a gigantic increase in the demand for
high-tech, armed private security forces (especially in Colorado). The reason is, dispensaries
can take in lots of cash in revenue every day (larger ones can net $1 million in a single day),
and that money can't be deposited into banks because of the fear that their assets will be frozen
by the Feds. As a result, huge sums of money get driven around in armored cars with armed
guards. Private security, mostly staffed by ex-law enforcement and ex-military ruffian types, is
booming in states with a legal marijuana industry--meaning that some of the best economic
opportunities for an Army Sergeant returning from Afghanistan might include "armed, legal drug
money guard." The disconnect between the legal drug economy and the rest of the economy
also makes it tough to measure the overall effect legalization has on a state's economy--it's all
cash and no banks are involved.