Marijuana Growth in BC

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Appeared in the National Post

Should Marijuana in Canada be grown, regulated and taxed like any other commodity? At the present time there is little evidence that the prohibition on production and consumption is successful in making it unavailable. For those of you who doubt, ask a child whether he or she knows someone in school from whom they could get marijuana. In fact, nineteen percent of children between the ages of 12 and 15 and twenty-three percent of all Canadians over the age of fifteen have tried it (and presumably inhaled), and nearly two million are currently using. These numbers are likely to increase, as most Canadians who have never used are today’s seniors. Boomers are, or were, in the vanguard of users, and younger people use more frequently than older folks.

Marijuana cultivation can be found across Canada and British Columbia has been a particular locus of production. To give some idea of the scale of operations, in year 2000 there were 2,800 “busts” of marijuana grow operations in BC. If the police were able to find and demolish ten percent of all “grow ops” in the province, it suggests that there were 28,000 out there. Based on a little economic theory and modest data, I estimate there are about 17,000 -18,000 marijuana grow operations at this time. Since the average operation that was busted had 180 plants and each plant yields about 33 grams of usable marijuana dry, British Columbia’s commercial production is probably in the range of 400,000 kilograms (using the conservative assumption that there are 4 crops a year).

This is a lot of product and it is worth a lot of money although exactly how much depends in part on the units in which the crop is measured. A kilogram of marijuana may sell for as much as $5,000 wholesale. If these production estimates are reasonable, then the value of the BC crop is worth something like $2 billion at the wholesale level. Naturally, retail would sell for far more. Marijuana purchased for $15 by the gram makes a kilogram worth $15,000. Using these units would inflate the final value of the crop by a factor of three. How big is this? In 2000 the gross domestic product of British Columbia was roughly $130 billion, so that depending how you want to value local production, sales of marijuana output amounts to between 1.5 and 4.6 percent of the province’s GDP.

Since British Columbia is likely to consume only 30,000 or so kilograms, the rest is destined for markets in the US or the rest of Canada.

There are other consequences of the marijuana prohibition. Resources are used not only for finding marijuana grow operations, but are also needed to prosecute and penalize offenders. In 2001, 50,000 Canadians were charged with possession, 11,000 with trafficking, and 9,000 with cultivation. This should be expected since there are currently nearly two million Canadians who use marijuana.

A difficult issue to forecast is what might happen if marijuana were made legal. Should the price of marijuana fall, as we would expect, usage would rise. This is unacceptable to many. One strategy could be to tax marijuana at a rate that keeps the current retail price the same. To the extent that consumers are paying it now, there is no reason to believe that they would not be willing to pay the same for the product when legal. An estimate of the retail price of a marijuana cigarette puts it at about $8.50 while the cost of production is $1.50. This would imply a tax rate of $7 per cigarette that would keep prices the same as they are now. If domestic consumption is in the range of 160,000 kilograms and a cigarette is about half a gram, then tax revenue implied by this standstill arrangement is over $2 billion. This is some carrot, and it would have additional advantages.

At the present time, the differential between final sales price and the cost of production goes to distribution costs and profit. In many cases these profits are going to organized crime and provide base funding for unsavory activities that most of us abhor. Were marijuana legal, these funds would no longer be available for mob use. In 1917-18 in Canada, and in the 1920s and early 1930s in the US, alcohol production and consumption was heavily restricted or prohibited. Gangsters like Al Capone were able to use the profits from illegal alcohol production to build criminal empires whose legacies we continue to live with nearly a century later. Removing alcohol prohibition generated many problems, but none like those afflicting society in the days of Murder Inc and their ilk.

Potentially, the biggest problem Canada would have if we were to legalize marijuana is with the United States. If the US were to add to the frictions of trade by requiring special inspections and the like, then there is no doubt that this could damage our income far beyond any advantage that could be had through legalization of marijuana. It is ironic that legalization and regulation in Canada might do more to reduce the flow of marijuana to the US than a continuation of currently illegal production and extensive exportation. Legal producers risk losing their licenses for profitable enterprise through illegal sales, and these same producers certainly would not want competitors illegally profiting through exports. The industry would have incentives to comply with local production regulations although as long as the US retains prohibition, the incentive to supply the US market continues to provide lucrative opportunities.

As more and more Canadians are of a generation for whom marijuana is not an unknown commodity, it seems likely that our attitudes and laws will more faithfully reflect our experiences. Marijuana consumption is widespread in Canada and has been for some time. Production gives every indication of being widespread. Consequently, the broader social question becomes not whether we approve or disapprove of local production, but rather who shall enjoy the spoils. If we treat it like any other commodity we can tax it, regulate it, and use the resources the industry generates rather than continue a war against consumption and production that has long since been lost. What is the appropriate policy? How do we weight the US response? These are the kinds of issues we should be discussing with respect to marijuana