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Why the government can’t charge more than $10 a gram for legal pot

Governments may be hoping for billions of dollars in new tax revenue from legal marijuana sales, but prices can only go so high. .
Governments may be hoping for billions of dollars in new tax revenue from legal marijuana sales, but prices can only go so high. . GETTY IMAGES

On paper, marijuana sales may be a government monopoly after legalization, as alcohol sales largely are now.

Deficit-plagued provinces, struggling to fund hospitals, roads and education systems, may be tempted to squeeze as much tax revenue from pot as possible.

In January, a CIBC World Markets report estimated that the federal and provincial governments might be able to share up to $5 billion in new revenue from marijuana taxes, ” … but only if all the underground sales are effectively curtailed.”

But pricing pot will be a delicate exercise in maximizing taxes while not driving buyers back to the black market. It doesn’t help that the black market already exists and is deeply rooted.

READ: Tax revenue from legal pot could hit $5 billion each year, CIBC says

“They have to find that sweet spot in between,” says University of Toronto PhD student Jenna Valleriani, who studies marijuana dispensaries. “People have been purchasing off the black market for twenty years, thirty years. It’s going to be really difficult for them to walk into a store and purchase their cannabis legally.”

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“On the street, the average is about $10 a gram, with that decreasing as you buy more volume,” she says. “On the medical market it’s somewhere between $6 and $15 a gram, depending on quality and the type of strain.”

To really eliminate the black market, legal pot would have to be sold for under $10 a gram, Valleriani says.

On the other hand, governments may not want to price it that low. For many years, Canadian provincial governments have set minimum prices for alcohol for public health (and revenue) reasons. It may seem logical to do much the same thing with marijuana.

WATCH: As the Liberal government works to make legal marijuana a reality, the Canadian Medical Association is weighing in. The organization says there should be an age limit for smoking pot and offered a wide-range of other recommendations that might not sit well with legalization supporters. Mike Le Couteur explains.

Canadian Medical Association wants age limit for marijuana
Canadian Medical Association wants age limit for marijuana

By the end of August, Colorado had made just over US$50 million in marijuana taxes so far this year. (State taxes on pot add up to 27.9 per cent.) Colorado, which legalized marijuana in 2014, now makes more money taxing pot than taxing alcohol.

Much of that money, however, seems to have been spent by marijuana tourists visiting the state. Tourism in Colorado increased when legalization took effect. It remains to be seen whether Canada would see something similar, outside a few border communities.

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Converted to Canadian dollars and population, Colorado’s pot revenue would come to about $650 million a year in Canada.

Last December, Prime Minister Justin Trudeau seemed to be managing expectations when he said that legalization was more about health and safety than developing a new revenue source.

A series of hikes on cigarette taxes in Canada in the 1980s and 1990s turned into an inadvertent economics experiment as a large black market in tobacco developed. In 1994, Ottawa bowed to the inevitable and cut tobacco excise taxes, but a black market in tobacco, connected to organized crime, continues to flourish.

READ: Canada’s flourishing contraband tobacco market helps fund overseas terrorism: report

Setting a price point for marijuana will be even more challenging, given that a large black market already exists, with loyal customers and established relationships between pot smokers and the dealers they buy from, Valleriani says.

“There are embedded networks that people have been using for a really long time.”

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It may be possible to tax edibles a little more aggressively than pot sold for smoking, since it’s hard for black market producers to make high-quality products.

“It takes a lot of skill to be able to consistently dose one edible with exactly one gram. What usually ends up happening when amateurs make edibles is that you’ll have one cookie that’s like a bomb and the other one that’s very mild.”

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READ: How will legal pot be sold? Three things that might happen, and one that won’t

Another wrinkle is that black-market dealers give buyers steep volume discounts on marijuana. Every transaction carries risk for them, and they have a strong incentive to minimize them.

“It’s a really common feature of the black market,” Valleriani explains.

“A dealer on the street would probably prefer to deal in pounds, just to move their product a lot faster and with fewer interactions.”

Legal sellers, on the other hand, don’t have any reason to offer volume discounts, at least not to that extent.