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Cannabis Retail Pricing: Economics 101 for Government

Jeff Nielson Jeff Nielson, Stockhouse
8 Comments| March 21, 2019


A recent Stockhouse article presented readers with a bleak picture concerning the pace at which cannabis is being normalized in terms of fully legal commerce. Even where cannabis is now completely legal, consumers continue to get the vast majority of their cannabis from the black market.

In the state of Massachusetts, where cannabis is legal for both medicinal and recreational use, a Forbes article projects that 75% of all cannabis sales this year will be on the black market. In Canada, where medicinal and recreational cannabis is now legal nation-wide, a Vice article reports 72% of recreational cannabis sales in 2019 are expected to take place on the black market. Cannabis became fully legal across Canada in October 2018.

The previous Stockhouse article pointed the finger squarely at governments: on both sides of the Canada/U.S. border. One of the criticisms of these governments is pricing (i.e. taxation levels). A March 18th Financial Post article contained an interview with Krystian Wetulani, a cannabis dispensary operator in Vancouver, B.C. with two provincially licensed outlets. The article is illuminating – starting with the title.

'They think we are gouging them': Early lessons from the front lines of cannabis retail

The message here requires little explanation. Cannabis prices are too high in some Canadian provinces (as well as some U.S. states). Consumers are voting with their wallets for more reasonably-priced black market cannabis. Clearly these state and provincial governments need a refresher course in economics.

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There are two primary considerations here with respect to the appropriate pricing (i.e. government taxation) of cannabis.

  1. What taxation level provides the necessary degree of economic incentive to motivate consumers to cease to use the same black market supply sources that Canada and the U.S. have forced consumers to use due to cannabis Prohibition?
  2. What level of taxation is necessary to deal with economic/medical costs (to government) that arise from cannabis usage, and need to be recouped through taxation?

The second consideration is easiest to deal with so it will be reviewed first. Consumers are well aware of the sky-high government taxation levels on alcohol and tobacco products. Such taxes are obviously necessary.

Both alcohol and tobacco are toxic and addictive. Indeed, nicotine holds the extremely dubious distinction of being both one of the deadliest poisons known to humanity and one of the most extremely-addictive chemical substances. Alcohol and tobacco consumption leads directly to numerous serious (and often terminal) ailments.

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In addition to the horrendous economic/medical costs to deal with alcohol- and tobacco-related health problems, alcohol use also generates serious legal and social costs because of the plague of alcoholism. Obviously, governments need extreme taxation levels with these products to ensure that the users who knowingly assume these health risks are funding at least a significant portion of treatment costs.

None of this applies to cannabis.

Cannabis is non-toxic and non-addictive. As a potent medicine and health supplement, cannabis cures rather than causes health problems. With fully legalized cannabis now a reality for several years in a number of U.S. states, there is no empirical evidence of any “user costs” that governments need to recoup via taxation.

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This leads us to the other consideration for cannabis taxation: market economics. One, primary reason governments have given for cannabis legalization is the chance for government to tax this benign activity (like it taxes everything else in our lives). The fact that there was never a legitimate reason to criminalize cannabis in the first place somehow escapes these governments when they announce their rationales for legalization.

However, if governments over-tax cannabis for political reasons (to pretend that cannabis is a “harmful substance” like alcohol or tobacco) or over-tax cannabis out of simple greed, then they will not maximize tax revenues. They will minimize tax revenues, as consumers shun official supply sources in favor of reasonably priced black market cannabis.

That’s Economics 101. And that’s one of the ways in which Canadian provinces and U.S. states are failing to execute the transition to legalized cannabis in a responsible and/or efficient manner.

Unrealistic politicians need to get their heads out of the sand and comprehend the real picture here or the legalization (normalization) of cannabis commerce will continue to be severely impeded and delayed. There are both short- and long-term costs with respect to provincial/state governments who refuse to implement a reasonable level of government taxation and regulation/licensing fees.

  1. The gross underperformance of cannabis as an industry because government taxation (and regulation) folly kills revenues.
  2. Cannabis investors see their holdings grossly underperform due to this government folly.
  3. The economic loss for governments (and their residents) as over-taxation of cannabis minimizes rather than maximizes tax revenues.
  4. Legal cannabis cultivators begin to move back to the black market.

If government stupidity with respect to cannabis taxation persists and/or it continues to impose other supply bottle-necks that severely impede consumption (and reduce revenues), cannabis cultivators will follow consumers – and move back to the more functional and economically balanced black market.

Cannabis consumers need to be proactive: telling governments that unreasonable taxation (direct taxes and/or excessive licensing costs) is forcing them to either turn to black market suppliers or forgo consumption altogether of this legal and benign substance. After 100 years of totally unjustified cannabis Prohibition, Canadians (and Americans) should not have to tolerate additional bureaucracy, stupidity, and inefficiency.

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Cannabis investors and publicly-listed companies also need to be more proactive. Illuminate bureaucrats and elected officials concerning the economics of cannabis. Confront them with the appalling numbers concerning continued black market consumption.

With cannabis now fully legal in Canada and well on the way to becoming fully legal in the U.S. (a majority of American voters from both political parties support full legalization), the story remains the same here. Government continues to be the problem, not the solution.

The last word belongs to dispensary-operator Wetulani, on the “front lines” of cannabis retail in Canada:

If you had advice for someone going into the legal cannabis retail space right now what would it be?
 

I would say it is quite challenging. The municipal and provincial regulations you have to go through are intense, the time and money it requires to open the store. I would say to people to be careful before starting to throw in all their life savings. Not all locations make money. I would just caution them. There are a lot of procedures you have to go through: all your staff have to be vetted and go through security checks, there are SOPs (standard operating procedures), there’s tons more than people think there is to operate the stores.

A damning indictment. Seemingly, Canadian and American governments are just as intent on failing their populations (and cannabis investors) with respect to the legalization of cannabis as they did with its needless criminalization.






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Comments

Canuck21C
The author makes a good case with over taxation but there are plenty more reasons why all the governments involved have dropped the ball with cannabis retailing. The Vancouver dispensary owner does mention numerous regulatory issues and suggests the current provincial government is conflicted with their hybrid retail model. The largest problem for this industry is still dealing with the well-connected established government and business competitors who obstruct them at every turn.
(1)
April 4, 2019

NoMoreTax
Has anyone noticed all Stockhouse can report on is weed. They must also be paid off by Trudo. Is there not any other f'ning market to write a report on?
(1)
March 25, 2019

Woodside0
The author says, "...sky-high government taxation levels on alcohol and tobacco products. Such taxes are obviously necessary." It is far from obvious that that there is any necessity for any sin tax . Certainly fair taxes to pay for necessities, but not for Reefer Madness!
(0)
March 22, 2019

Woodside0
Well thy cut the comment below but you get the idea
(0)
March 22, 2019

Woodside0
Initially with real legalization there was to be great savings in enforcement costs. Instead the Reefer Madness Crew took over and bought off the cops by doling out all sorts of tax money promises for increased enforcement. This punitive reefer madness attitude just added lots of stupid costly demands. Rather than prohibiting anyone in the black market they should have brought the black market into the fold. When Justin's Dad a problem with cops breaking the law he just made it legal and...
(0)
March 22, 2019

Woodside0
In early reports of this new edible tax BNN got it wrong and said the new penny tax on edibles was lower than the $1.00 tax on flower. In this case (see below) the new tax is 300% higher than the flower tax!.
(0)
March 22, 2019

Woodside0
They want comments but not too much. Since I took the time to write the above I might as well post the rest
(0)
March 22, 2019

Woodside0
Canada's "Legalization, but not necessarily Legalization" failure to eliminate the black market is not just due to heavy taxation. Although lower taxes certainly would help. The current $1.00 per gram tax on flower cares not whether the flower has 10% THC or 30% THC. A gram of good flower at 30% THC gives 300 milligrams of THC for a dollar tax. However the new tax rate for edibles at 1 cent a milligram would only give you 100 milligrams of THC for the same $1.00 tax. In early...
(0)
March 22, 2019

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