Canada had the perfect model to make cannabis retailing work. We ignored it

Opinion: There is still time for Canadian governments to serve the public by copying the market for alcoholic beverages

By Herbert Grubel

When Bill C-45 was passed in 2017, making the sale and recreational consumption of cannabis legal, politicians proudly announced that Canada’s legalization of cannabis and the regulations around its sales and production would provide a guide to the world on how to legalize.

However, 19 months after the bill passed, and nearly eight months after legalization took effect on Oct. 17, 2018, provinces have failed to licence enough retail stores and suppliers to meet the demand of consumers. As a result, unlicenced retail stores and black-market dealers continue to operate. Supplies come from unlicenced growers, some of which may have links to criminals and organized crime.

Nor are these conditions likely to improve soon. The reason is that politicians are involved in the design of regulations of the market, which allows interest groups to ask for special favours in return for electoral support: Labour groups have pushed for retail stores to be owned by the government and operated by unionized workers. Potential producers and retailers of cannabis want licensing rules that protect them from domestic, foreign and internet competition.

Then there are regulations ensuring the purity of cannabis products, the correct labelling of the amount of active ingredients, prohibition of sales to youths and the creation of proper enforcement procedures for these regulations. These regulations in the public interest are needed, but the process of creating them is unnecessarily politicized and delayed.

The irony is that these delays in the licensing of producers and sellers and the adoption of regulations of the cannabis market could have been avoided almost completely if politicians had been wise enough to copy regulations that currently exist for the market for alcoholic beverages.

This market once also involved total prohibition, but through time has been deregulated to where in most American states and European countries, and a slowly growing number of Canadian provinces, the production and sale of alcohol are almost totally run by private firms free from special operating requirements. (In other provinces, the free market remains stalled by the entrenched interests created by government liquor monopolies.)

In all jurisdictions that have moved to the use of private sector production and sales, government regulations are used to ensure the proper purity, alcoholic contents and labelling of alcoholic beverages. Laws restrict the sale of the beverages to youths and the operation of vehicles by impaired drivers is prohibited.

There is still time for Canadian governments to serve the public 

Alcoholic beverages and cannabis have in common a serious problem. It is widely believed that prices for these products determined in private markets would be so low as to lead to high levels of consumption and accompanying major health and social problems. For this reason, governments impose so-called sin taxes on alcoholic beverages and are expected to impose sin taxes on cannabis products eventually, too.

However, the ability of governments to impose these sin taxes is limited by the fact that, at some critical level, they encourage production and sales by black markets. After much experimentation, governments have set taxation levels that prevent the development of such markets while discouraging excess consumption and also raise considerable amounts of revenue for the authorities. The taxation of cannabis products may be expected to be set after some experimentation at a similarly optimal level.

There is still time for Canadian governments to serve the public by copying the market for alcoholic beverages: Abandon background checks and other licensing requirements for producers and sellers by simply letting individuals and firms operate production facilities and retail outlets risking their own money. Enact and enforce regulations affecting the quality and level of active ingredients in cannabis products like those that have been proven to work in the market for alcoholic beverages.

Under such a regulatory framework, competition among producers, sellers and importers would lead to the survival of the lowest-cost producers and of retailers offering the best services to consumers, while the public would be protected from the risk of consuming polluted or mislabelled products.

But chances are that politicians will not. They will instead continue to design regulations that will buy the votes of powerful interest groups — all justified as being in “the public interest” — but which will end up delivering licencing delays and inferior services to consumers, making it possible for unlicensed producers and retailers to stay in business.

Herbert Grubel is professor emeritus of economics at Simon Fraser University.

Read more at Financial Post

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