Pubdate: Wed, 11 Jan 2017
Source: Globe and Mail (Canada)
Copyright: 2017 The Globe and Mail Company
Contact:  http://www.theglobeandmail.com/
Details: http://www.mapinc.org/media/168
Author: Frances Woolley
Page: B4
Referenced: http://mapinc.org/url/spC7LQBu

CANADA'S POT INDUSTRY NEEDS INNOVATION TO THRIVE, NOT PROTECTION

The Task Force on Marijuana Legalization and Regulation did not say
"create a marijuana marketing board." Yet its recommendations would,
if implemented, effectively impose a supply management system on
cannabis. Suppliers would be licensed, and subject to production
limits. These controls would be set so as to "align supply with likely
demand."

A marijuana marketing board would protect existing producers, and keep
prices high. For the Task Force, this was precisely the point. They
wanted to encourage "market diversity," create "a space for
smaller-scale production" and prevent "the development of monopolies
or large conglomerates."

The task force had good reasons to be concerned about small-scale
growers. Producers squeezed out of the legal market might continue to
produce and sell illegally, carving out a niche by offering a tax-free
product and targeting underserved markets, such as youth and
after-hours sales. One of the most important goals on the marijuana
legalization agenda is keeping cannabis out of the hands of children
and youth. Driving small producers underground could subvert that goal.

Yet, ultimately, a legal marijuana market based on small-scale
production is doomed to failure. Absent severe penalties for illicit
production, legal marijuana cannot compete with illegally produced
weed on a price per gram basis. Legal "craft cannabis" growers will be
producing essentially the same product, and using essentially the same
technology, as reputable illicit dealers. Yet they will incur costs
underground producers can avoid, such as payroll taxes, licensing fees
and regulatory compliance costs. What's more, legal marijuana will be
taxed. Suppliers of illicit weed will win any price war.

Legal producers can only out-compete illicit ones through the creation
of high-quality, branded cannabis products. Fortunately, there is
enormous scope for "upselling" and product differentiation in the
marijuana industry. Cannabis differs, at a fundamental level, from
drugs such as alcohol or tobacco. The various marijuana strains
produce quite different "highs." Ones with high levels of the
cannabinoid CBD have analgesic, anti-inflammatory and anti-anxiety
properties, while those with more THC have stronger psychoactive
effects, producing a "stoned" feeling.

Innovative U.S. companies are producing products such as Mr. Moxey's
Ginger Mints, with a high CDB/low THC cannabinoid blend that leaves
your breath and perspective refreshed. They are differentiating their
offerings by creating lower-potency products, such as Crescendo's
white chocolate THC truffles (with fresh lemon and a hint of juniper
berries). It is the availability of these kinds of products that will
induce buyers to switch to the legal market.

Yet building and branding a high-quality product requires research and
development, investment in processing facilities, and money for
marketing. Moreover, if marijuana processing is in any way similar to
the processing of beer, tobacco, or other foods and beverages, it will
be subject to economies of scale. Large producers, and ones with
capital to invest, will be able to make a higher-quality product at a
lower cost than smaller ones.

So, if the legal marijuana market is to be successful, it cannot
entrench and protect existing suppliers. Out-competing the illicit
market requires that consumers be able to access the best possible
products at a competitive price. Suppliers who sell products consumers
want to buy need to be able to expand at the expense of less efficient
ones. Depending upon the technology of marijuana production, that
might lead to the legal marijuana market being dominated by a few
large producers.

Basically, marijuana regulators face a trade-off between protecting
inefficient producers and raising revenue. Canadians will not be
willing to pay more for legal marijuana than it would cost to obtain a
comparable product elsewhere. When producers' costs are relatively
high, governments will have to impose lower taxes, because otherwise
consumers will not buy in the legal market.

If the recommendations of the task force are implemented, the
trade-off between raising revenue and protecting producers will become
particularly acute, because Canadians will be allowed up to four
plants per residence for personal use. This is why a marijuana
marketing board may fail where milk marketing boards have succeeded:
it is much easier to grow one's own weed than produce one's own
cheese. Home production seriously limits any marketing board's ability
to protect producers and control supply.

The idea that marijuana legalization will lead to large-scale job
creation, and big revenue windfalls, is a pipe dream. The legal market
has to be efficient to out-compete illicit production, and efficiency
is as likely to kill jobs as create them. The revenue raising
possibilities of marijuana are strictly limited. The stronger argument
for marijuana legalization is simply this: Canadians will be able to
enjoy better-quality drugs.

Frances Woolley is a professor of economics at Carleton University.
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MAP posted-by: Matt