The Case for Retail Cannabis

By Samuel Kirsh (AIMS on Campus 2nd Place 2017 Essay Contest Winner)

A recent meeting of federal and provincial financial ministers led to an agreement to divide future tax revenue of legal cannabis sales 75%-25%, with the majority going towards provincial coffers. This is primarily because the provinces will be responsible for a substantial proportion of judicial and regulatory costs once recreational cannabis is fully legalized (slated for July 2018). While the initial instinct of many Nova Scotian’s would be to approach regulating cannabis in a similar manner to alcohol, there are several economic and demographic factors that must be considered before arriving at a definite conclusion.

One of the most significant variables is the infrastructural cost of implementing a system that mimics the Nova Scotia Liquor Corporation, a solution that has already been extensively developed by Ontario. While partnering with the provincial liquor board may curb spending in the short term, it requires establishing a parallel governmental system of management. In the current economic environment of the Maritimes, where aging populations are set to put increasing pressure on provincial budgets in the upcoming decades, this would be a frivolous and short-sighted measure that could work counter to its intended purpose. It would be more prudent to invest tax revenue from sales and the savings from law enforcement and judicial costs in public health initiatives than to commit the province to sizeable, indefinite expenditures.

It is also necessary to consider the current and projected price environment for cannabis. The Canadian Department of Public Safety issued a report that put the national average price per gram of high quality cannabis at $7.69, and demonstrated the inelasticity of demand for the product. This is of great significance as at least one government model (the Parliamentary Budget Officer’s) use the base price of $10/gram for cannabis. If $10 were the mandated price set by the government, this would negatively impact the consumer, as well as the government’s mission of addressing the role of organized crime in illicit sales of cannabis. The elimination of the criminal component in cannabis sales will be nearly impossible to achieve without the advent of a transparent market, away from the opacity of the current, criminally controlled one. Even at the comparatively low price of $7.69/gram, there is evidence that it is possible to fall further from increased competition, which will not occur through government mandated price controls.

The last, and perhaps most significant development necessary for the cannabis industry in Canada is that it will be the first nation of the G7 to legalize recreational cannabis. Canadian firms are better positioned than American firms to achieve a substantial first mover advantage in this market if regulatory liberalization continues. A consequence of state-only legalization in Colorado and California is that the dispensaries that operate are not able to fully invest and capitalize on their earnings, because cannabis is still a Schedule I narcotic according to the U.S. Drug Enforcement Agency. Thus, this is an opportune moment for Canadian firms operating in cannabis plant and value added production to cement this advantage. Aurora Cannabis, one of Canada’s biggest cannabis producers, recently signed a deal to begin providing German pharmacies with medical marijuana, the largest of its kind in the world. The natural extension of this trend is sales and growth with Canada’s largest trading partner, where cannabis has proven to be a tremendous growth product.

In conclusion, consider the three key factors discussed above. If allowed to price freely, the burgeoning competitive atmosphere among cannabis firms will lead to cost reduction, which can be passed on to consumers through lower prices of the plant itself and its ancillary products. Next, consider the drastic decrease in law enforcement and judicial expenses devoted to cannabis in its current, criminalized form. And as the Maritimes are projected to face considerable budget deficiencies, consider the economic boon that a recreational substance could provide to the province, if managed properly. At this time next year, there could be pressure from cannabis farmers and retailers to list ounces of cannabis on futures exchanges to help secure long-term pricing for their new cash crop.

 

 

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