Canada Can Learn From High Prices That Hurt Legal Marijuana Markets In The U.S.

Prime Minister Justin Trudeau has repeatedly said that the goal of legalization is to keep cannabis away from kids and to smother the black market for marijuana in Canada. But to achieve that, he might have to revise his legalization bill - which will be introduced this Thursday - and set lower prices for marijuana across the country.

Deciding the price of cannabis will be a tricky issue for lawmakers - and not just because they want to avoid giving consumers a severe case of sticker shock. Keeping prices low is essential for the legal regime to outperform the black market, according to Prime Minister Trudeau.

"The fact is that if you tax it too much, as you saw with cigarettes, you end up driving things toward a black market, which will not keep Canadians safe - particularly young Canadians," Trudeau said in December 2015. "Yes, there is potential for a bit of revenue on that, but we're certainly not looking for a windfall."

That's probably why his cannabis task force recommended setting cannabis prices at $8-10 per gram, which would be competitive with street prices in many communities across Canada. However, that recommendation didn't make it into the legalization bill that will be introduced to parliament this Thursday. The new bill is expected to let provinces and territories decide the price of pot in their jurisdictions. That decision could weaken the effectiveness of legalization by keeping street dealers in business. Simply put, provinces that try to gouge cannabis consumers will likely drive up business for the black market.

That's what happened in the early days of legalization in Colorado, according to Herbert Fuego of Westword. In 2014, he visited a highly rated dispensary in Denver and was shocked at the asking price for cannabis. The strains were some of the best he'd ever smelled, but the prices made him turn up his nose. They were going for upwards of $70-80 US for an eighth of an ounce (3.5 grams), so Fuego left the shop empty-handed and bought 4 grams for $30 from a friend who grew plants in his basement and sold a few buds on the side.

But that dispensary soon caught on to the problem with its business model. When Fuego visited it again two years later, he found that the cost of an eighth had dropped to $40 after tax. That price was low enough to push his friend out of the black market.

Meanwhile, Washington state - which legalized recreational marijuana in 2012 along with Colorado - is still struggling with the black market because the tax rate on cannabis is so high. Street dealers still thrive in cities like Seattle because their prices are better than legal dispensaries, which are required to charge consumers a 37 percent tax on all recreational cannabis sales. That's almost triple the tax rate paid in Colorado. So it's not surprising that more Seattleites are buying on the street instead of in the dispensary.

But what is surprising is that Washington stands to make more money by reducing taxes than by keeping the high rate. By reducing the cannabis sales tax from 37 to 25 percent, Washington could raise an additional $1.085 billion in tax revenue per year, according to financial experts. The extra cash would come from the increase in legal sales that would occur if dispensaries could offer better prices.

shutterstock 450701470

Canadian Prime Minister, Justin Trudeau.

So if Prime Minister Trudeau does leave the price of pot to the provinces and territories to decide, they should learn from the examples of Colorado and Washington state and keep the price of cannabis low. Low prices would help them take a massive bite out of the black market while also helping them raise more tax revenue than they would if they tried to gouge consumers.

Latest.

Ever since recreational cannabis was legalized for adult consumption across Canada in mid-October the industry has been struggling to meet demand. And that's not going to change anytime soon, according to Prime Minister Justin Trudeau. In a recent interview, Trudeau admitted that the chronic cannabis supply shortages have been the biggest challenge the newly legalized industry has been facing.