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cost of cannabis

Paying The High Price: Why The Cost Of Cannabis Is A Public Health Question

As more states legalize recreational cannabis, we have an opportunity to increase consumer safety and reduce harm, goals in line with the stated objectives of many drug policy researchers and advocates for legalization. But if we are serious about minimizing the harms associated with cannabis, our strategies around the cost of cannabis are an important (and often overlooked) place to focus.

Recent research led by Dr. Jason Childs, professor of economics at the University of Regina in Saskatchewan, found that in order to minimize social harm, the price of legal cannabis needs to be lower than the price of illicit cannabis. Conversely, if the objective is to maximize revenue, legal cannabis should be priced higher than illicit cannabis. 

This may seem obvious, but these objectives are inherently at odds. Most markets in Canada are set up to maximize revenue rather than prioritize public health and social support. And while the Canadian government is “succeeding” if the goal is to make as much money as possible, if the goal is harm reduction, the picture doesn’t look so rosy. That’s a problem given the Canadian government stipulated that protecting public health and safety was the primary motivation behind the decision to federally legalize recreational cannabis. 

Economics 101: How Externalities Add to the Cost of Cannabis

So why is legal cannabis so expensive compared to what can be purchased on the illicit market? The answer lies in economics, Childs explains. As is the case with alcohol, tobacco, and carbon, a governmental “sin tax” is often levied on products that are considered to be harmful, or, in economics lingo, products that generate “externalities.”

What are externalities? To explain the concept, Childs uses the analogy of gasoline, which “does damage to people who didn’t decide to burn the gasoline,” he says. “If we have a free open market, we have gasoline burned and more harm incurred than we would like.” 

With respect to cannabis, these externalities might include greater demand for public health services, impaired decision making and driving-related skills, and increased criminal justice costs, hence the high tax in an attempt to limit these harms.

But taxation doesn’t solve those problems, because the legal market doesn’t exist in isolation. In fact, when one substance (illicit cannabis) is associated with higher social harms than legal cannabis is, a tax on legal cannabis actually reduces social welfare by incentivizing people to continue purchasing products in the illicit market, consequently working counter to its purported objective of reducing externalities.

When Childs analyzed different pricing scenarios, he found that increasing the cost of cannabis on the legal market doesn’t increase demand for illicit cannabis in any meaningful way, but it also doesn’t reduce demand for illicit cannabis. That’s because people who are already buying weed on the unregulated market are likely to keep buying that way.

What’s The Problem With the Illicit Market, Anyway?

Among the many potential benefits of legalization, when the cannabis market is regulated, consumers can feel safer about their purchases thanks to testing and standardization. At a dispensary, people know what they’re getting because products are labeled and subjected to quality standards to ensure they are not tainted by pesticides, mold, or other contaminants. (The B.C. government announced just yesterday that in testing cannabis seized from illicit growers, “many samples contained contaminants that would not be allowed in the legal cannabis market.”)

When cannabis is regulated, public health information on the effects of use is more readily available, we’re able to research cannabis and its potential uses more rigorously, and we can work more effectively toward dismantling the racist drug policies that have disproportionately targeted and incarcerated Black and Brown people for decades. (Black people remain far more likely to be arrested for cannabis, even though use rates are similar across races.) And despite widespread legalization throughout the United States, in 2018, 40 percent of drug arrests were for cannabis, and 92 percent of those arrests were for possession. 

But as long as the illicit market is still thriving, we won’t see all those benefits, according to Dr. Childs. 

“You need to induce people to switch from the illicit cannabis, which is generating greater harms, to the legal kind. People don’t just switch automatically,” he explains. “They’re used to a source or supply and… if we don’t induce them to switch, we’re not getting the gains of legalization.”

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One Arrow, Two Targets

Is it possible to strike a balance in terms of finding the right price for cannabis? According to Childs, you “have to decide what your objectives are.” The incentives for the cannabis industry and the government are at odds, so we have to weigh whether we want to maximize revenue or minimize harm. 

Says Childs, “You have one arrow; it’s really hard to hit two [targets].”

We’ve already demonstrated how a higher cost of cannabis in the legal market works in terms of generating revenue. But Childs explains, “if we want to eliminate the illicit market, we’ve got to outcompete them.” Underselling the illicit cannabis market, he says, could be a viable means of harm reduction.

How are we doing in terms of reducing the size of the illicit market? While data from Statistics Canada points to a widening gap, it’s hard to know for sure. “You can’t look at a quarterly report for illegal cannabis,” says Childs, but if we follow StatCan data, it appears that close to half of spending on cannabis comes through the legal market. 

If we turn our focus from generating revenue to reducing harm, it becomes even more important to understand exactly what these harms are. Childs explains that research attempting to assess these harms is outdated or low in quality. 

“Everyone says there’s an externality here, but no one knows how big it is.” That will be the focus of Childs’ next research project.

He hypothesizes that the harms of cannabis consumption aren’t the same for all users, and may vary systematically across users. Childs poses a potential scenario where, if one cannabis user smokes two to three grams per day, an extra gram may be more damaging to that person’s health than it would be to a person who smokes one joint a month. 

“We see this with alcohol and some other products: it appears that having a glass of wine every once in a while isn’t that damaging, but having six a night is rather damaging,” Childs says. Cannabis use may follow the same logic, and if that’s true, Childs says, “a simple one size fits all tax constructed at the average of harm is probably not the correct value.”