An Inconvenient Conundrum for canadian government marijuana law makers

It’s full steam ahead for the Canadian government’s marijuana legalization legislation but ominous clouds are gathering on the horizon from places like Colorado where this experiment in retiring the black market, increasing tax revenues and reducing availability for youth is currently ongoing.

What Colorado demonstrates is the inconvenient conundrum that all legalizing governments face as they attempt two contradictory things at once. 

Let me explain.

Economics 101 - Supply And Demand

First, in order to have any effect on black market sales, governments must keep the price a consumer pays equal to or less than the black-market price. At the same time, they must maintain a high enough price to discourage demand and use.  This is a classic case of trying to ride the horse forwards and backwards at the same time.

When you combine both a lower price and a lower tax rate you increase demand but your tax revenue is significantly lower. If you have a very sunny disposition, as we may assume of the Canadian government, you would hope all the previous demand serviced by the black market would now switch over to the government vendors thereby achieving the  tax revenue goal by sheer volume of sales.

Alas, if only the gentlemen in the black market played by the same Duke of Queensberry rules.

Higher Rates of Use Among Youth, Lower Taxes Collected, Higher soft and hard social Costs

The black market, operating underground with lower costs, knows a niche market when it sees one.  As with contraband tobacco, which comprises half of all cigarette sales in Ontario because they are so cheap, organized crime will simply lower their marijuana price sufficiently to remain the price leader.

So begins a race to the bottom. The legal pot growers, now having a very powerful lobby, will pressure the government to reduce both taxes and the rates on their products and allow them to also market the "benefits" of buying from them rather than the black market.

Price competition is only one part of the conundrum.  To appreciate what happens next, we do not have to theorize from our ivory towers or look askance at the Ontario contraband cigarette market. 

We only have to look at what has occurred in Colorado.

the colorado experience

In 2012, the government estimated tax revenues of $67 million but then three months later revised the estimate to $54 million . Fast forward to July 2014, the year they finally opened their pot shops, and the tax estimate was again revised downward to only $30.6 million.

Why?  Because, having expected the clear majority of the 116,180 patients on the medical marijuana registry would switch over to buying from the retail locations, only 5,201 users made the switch.  And the other 110,979 users?  Naturally they stayed with the “medical” program. With a mere 2.9% tax, it was less expensive than retail purchases which were subject to higher special sales and excise taxes. 

The fact that Colorado legislators expected so many to leave the program for the retail side implies they understood these users did not really need “medicinal” marijuana.  Indeed, public records from Colorado show that 94% of users claimed “general pain” and 68% were males.

Youth rates of use in Colorado increased 56% to 12.16% vs 7.15% for the country

As a result, things have certainly become interesting in Colorado.  Special taxes were supposed to pay for the social costs incurred by legalization.  Adding insult to the injury, a recent “60 Minutes,” reported that the black market continues to grow, not retract.

Colorado also hoped that through legalization fewer youth would be able to obtain the drug.  Instead, a 2014 American survey spanning over thirty years quotes teenagers who themselves say that it is harder to get marijuana when it is illegal (Monitoring The Future, U. Michigan, 2014).  Similarly, “The Legalization of Marijuana in Colorado:  The Impact Vol. 3 Preview 2015” shows that past month marijuana use among 12-17 year-olds rose 56% to 12.16% for this cohort compared with the national average of 7.15% for the same cohort. This data extends to 2013 when legalization first occurred though retail sales did not begin until 2014.  The trend suggests rates will have risen in the intervening three years.

So, what should we learn from this?

It seems as a society we learn our lessons the hard way. In Colorado, the result so far has been lower tax revenues and higher usage and abuse rates.  That impaired driving fatalities and mental health issues have also increased will come as no surprise to readers.

This is the way the conundrum crumbles.