Fraser Forum

William Watson: Pricing pot? Let the market decide, dude!

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Federal and provincial officials will meet next month to start deciding, among other things, what marijuana will sell for in this country once legalization takes place, as it’s supposed to in the not-too-distant future.

An economist’s reaction to that idea is too easy: What have they been smoking? Have they been dipping into free samples supplied by industry lobbyists? Have they befriended that one physician who writes 57 per cent of the military’s medical marijuana prescriptions? How can they possibly imagine they or their officials are equipped, even after the most intensive study of the existing not-very-black market, to decide the right price for marijuana? Or for anything, for that matter?

It’s not as if we’ve had such great success with controlled prices. Our system of agricultural supply management works so well we need tariff rates in the hundreds of per cent to keep out cheaper foreign product. (The current tariff on ice cream—ice cream!—is 265 per cent.) Our forecasting of future oil rates at the time of the National Energy Program in the early 1980s was an almost comical disaster. Our governments divvied up oil and gas revenues under the working assumption that prices would keep going up and up and up and of course they almost immediately started moving down and down and down. More recently, in 2008, one prominent analyst was forecasting oil at $225 a barrel by 2012.

That didn’t work out so well, did it?

What should we do with marijuana pricing? Nothing. We should let private agents buy and sell it at whatever price they agree on, subject to whatever sales taxes apply in the jurisdiction they’re operating in. That means GST, HST, the provincial retail sales tax or, in Alberta, nothing. We don’t actually need a meeting of ministers or officials to bring that about. The application of existing tax regimes should be straightforward.

Of course, the reason officials will meet next month is that they’re going to treat marijuana as only a quasi-legal product, like tobacco and alcohol. Canadians will be free to buy it, so long as they’re 18, but we’re going to discourage its use by taxing it a lot. Taxing it, in fact, almost up to the point—but not beyond—where a black market emerges, since the black market is harder to control than the legal market. If you’re worried about kids smoking pot, and we should be, you want to destroy the black market as completely as possible and then enforce age limits at points of legal sale. But the best way to do that is to let the legal price go as low as possible.

That does carry the disadvantage of encouraging consumption, including by younger people. Would higher taxes discourage consumption? Sure they would. My family lived in France for a year in the early 2000s. Wine was cheap, plentiful and delicious. We ended up drinking more of it than we do at home—though possibly because we knew we would return home and should take full advantage of our year in wine paradise.

So high taxes have their advantages, if you do want to discourage consumption. But high taxes also encourage the black market. Canada has had plenty of experience with that with the cross-border tobacco trade.

Are governments likely to hit the pot sweet spot, with prices just high enough to discourage consumption and raise a nice pile of new revenue, but not so high that a black market emerges that enables more kids to develop a weed habit? Are Canadian governments anywhere near the sweet spot for tobacco and alcohol? Sweet spots are hard to calculate—that’s my point—but I very much doubt it.

Better let the market determine the price, impose normal sales taxes, and police legal points of sale strictly to make sure minors don’t have access—and then dedicate all the brain power you would have devoted to calculating the optimal marijuana price to other more solvable social problems.

If that strategy ends up working for marijuana, we should then consider it for alcohol and tobacco, too.   


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