Cannabis in Canada: Will there be enough legal supply?

Along with Rosalie Wyonch of the C.D. Howe Institute, I am currently conducting research on trying to estimate the size of black market for cannabis during the first year of legalization, from October 2018 – September 2019. These estimates are constructed taking into account legal-illegal price differences as well as the gap between market demand and available legal supply. 

We focus on calculating potential losses in government tax revenue corresponding to supply shortages and illegal activity. 

Our results indicate that at current levels, legal supply will only meet roughly 50-65% of total demand. The important policy conclusion is that there will not be enough legal supply, especially during the first half of the year following legalization, primarily because of the slow rate of licensing producers. 

Provincial governments will have the ability to set prices as well as taxes, and therefore have the ability to eliminate supply shortages through sharp increases to either. However, this is extremely unlikely given the key policy objective of eliminating black markets. Higher prices will simply result in more illegal supply. This is particularly relevant given the ease in ordering illegal cannabis online, and the ability of firms to deliver products to consumers through Canada Post. 

The amount of total lost tax revenues from the proposed federal excise tax on cannabis, goods and services taxes, and provincial sales taxes ranges from $773 m - 1.2 billion when considering both the black market and supply shortages. These are significant losses and the Federal Government should take immediate steps to ensure that regulatory barriers do not unnecessarily hinder licenced producers from producing adequate supply to meet national demand. The loss in tax revenue is especially large considering the projection of $400 million in government revenue from the proposed federal tax. In addition, to improve the competitiveness of the legal market with the existing black market, the federal government and Health Canada should develop regulations for the sale of edible and concentrated cannabis products. To minimize black market activity, provincial governments should ensure policies are conducive to a competitive retail distribution, similar prices to those in the black market, and increase enforcement of cannabis laws at the outset of legalization.

Dr. Anindya Sen is a Professor of Economics at the University of Waterloo. His research interests are in the economics of public policy, with an emphasis on estimating the statistical effects of government intervention. In this respect, he has published research on the impacts of higher cigarette taxes on smoking, the effects of higher minimum wages on employment and poverty, the relationship between clearance rates and crime, and the consequences of incentive programs on electricity usage. His work on the effects of retail alcohol and marijuana deregulation has been acknowledged and cited in the National Post, The Globe and Mail, and the Toronto Star.

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