I write a lot about the economics of cannabis on this site, not only because it’s a subject I’ve studied for over 20 years and am extremely interested in, but also because it’s important. Every marijuana consumer is affected by the economics of cannabis.
Most of this effect is reflected in the prices of cannabis products. A lot of factors go into determining price, especially when it comes to legal cannabis. Taxes have to be paid, regulations have to be adhered to, and those costs will filter down into the final price of a product. But in the end, two things put more pressure on the price of commodities than any others: supply and demand.
If the goal is lower prices – and for consumers, it is – then either supply needs to be increased or demand needs to decrease; or a combination of those two things. Since 80 years of prohibition have taught us that even the risk of jail will not lessen the demand for marijuana, we are left with supply.
This brings us to Canada and their problems with unleashing legalization. A recent report asserts that there is a roughly $4.72 gap between the price per gram of legal marijuana vs. black market marijuana. When the same group looked at the issue 3 months ago, the gap was only $3.62.
As a practical matter, this means that a lot more marijuana is being sold by the illegal market than the legal one, and as the price gap grows, so will the gap of marijuana sold between the two markets.
While things like taxes and regulations can be adjusted and costs can come down some due to those adjustments, let’s face it: for the most part, government officials are loath to give up either power or revenue.
So it all comes back to supply. Taxes and regulations are barriers here as well, as they keep investors out of the industry. More investors eventually leads to more supply, which is desperately needed to bring down prices. Licensing limits, excessive fees and any other barriers that keep willing participants out of the industry all also contribute to the restriction of legal supply.
It’s hard to imagine the damage that has already been done to investors in Canada as they get pummeled by the illegal market. How much money has been driven away, never to return? How many investors have decided to take their money elsewhere, either because they lost money in the industry or got scared off by those who have?
Nothing is more crippling to an industry than scared investors. And an industry that can’t compete is very scary indeed.