The Pricing Puzzle: What should legal weed cost consumers?

One of the most anticipated pieces of information in the lead up to marijuana legalization is the rate at which weed will be taxed. The federal government has made it clear that provinces will have the right to determine how weed is sold and distributed, which also means they will have the right to set prices. But it is unclear as to how the tax regime on weed will be instituted.

Low tax or no tax at all will create the impression that governments are encouraging the use of recreational weed; a high tax will push marijuana prices above the illegal market rate, negating the whole purpose of legalization.

There have been various estimates floating around on just how much a gram of weed will end up being priced at.

A November 2016 report from the Parliamentary Budget Office claimed that between February 2015 and August 2016, a gram of weed on the black market cost an average of $8.32. That same report went on to estimate that once it is made legal, the pre-tax price of weed wouldn’t dip below $6.67 per gram, with a median price of $7.50 per gram.

An analysis by the investment firm Canaccord Genuity, also released late last year, predicts that the medical and recreational marijuana market will remain steady at about $8 per gram until roughly 2019 or 2020. According to the authors of that report, post-legalization demand is likely to exceed supply, so you won’t see prices going down at least initially. Eventually though, when production capacity catches up with demand, a gram of weed could cost somewhere in the $6-7 range.

This week, the C.D. Howe Institute put out a report estimating that if legal weed prices were to hover around the $9 mark, tax included, the government would stand to rake in $675 million in tax revenue.

Treading the Tax Tightrope

“Tax it too much and the black market slips underneath you. I would say let’s not tax it at the beginning and let’s hurt the black market as much as we can,” McGill business professor Kenneth Lester told VICE Money.

Lester is a strong advocate of eliminating a potential tax on weed altogether, at least upon legalization. “Let’s have no tax, or maybe a small tax at first, and then when you see there are signs that the illicit market is shrinking, gradually increase that tax,” he said.

His opinion is echoed by long-time industry observer Khurram Malik of Jacob Securities. “The strategy should be to price on par or lower than the current black market to help shrink it,” he told VICE Money. “That’s also why the legal age is likely to be 18 and not over 21.”

If we were to believe numbers in that recent C.D. Howe report, a $675 million tax bump is actually pocket change when it comes to the federal government’s balance sheet. Indeed, It is possible to conclude that the government’s incentive to place a tax on weed is more a moral and political obligation, rather than a financial one.

“Everybody is talking about this windfall of cash that the government is going to get. But really, the government isn’t giving up a lot in tax revenue if it chooses not to tax weed at all.” says Lester.

He argues that the real savings comes from the act of legalizing weed completely, and crushing the black market with cheap legal cannabis prices. “We spend so much money chasing people, throwing them in jail. There’s a huge social cost to that too. I’m trying to convince them [members of the Marijuana Task Force] to not get all hot and bothered about taxing weed.”

Different Strains, at Different Prices

For the most part, if you’re not a consumer of recreational or medical marijuana, you’re probably under the assumption that cannabis is a fairly homogenous drug. That’s actually far from the truth. In an attempt to distinguish themselves, licensed marijuana producers have been producing and packaging different strains of marijuana, targeted at different segments of the market.

Aphria Inc., the popular Ontario-based medical marijuana company produces weed at $1.31 per gram right now — that’s an industry best, according to market watchers. But Aphria’s CEO, Vic Neufeld has bigger dreams. He’s leading a charge to expand the production site by 200,000 square feet, with the aim of driving production costs down to $1.00, and then $0.80 by 2019.

“Aphria is telling people they want to be the Walmart of the space. They’re producing at the lowest cost right now,” says Lester. In a brief email to VICE Money, Neufeld stated that he wants his company’s ending retail price to not exceed $5.00 per gram, without taxes.

Aphria’s direct competitor, the weed behemoth that is Canopy Growth Corporation, currently prices it’s low-end strain of weed at $5 per gram. Medreleaf, another Ontario-based grower sells “trimmings,” or leaf material left behind from buds at $3 per gram.

And then you have weed distributors who are laser-focused on the potential of the high-end market — people who are willing to pay a premium price for dried bud. In California for instance, there is Club M, a marijuana distributor that professes to have “changed the marijuana game “ by selling the “very best cannabis-infused products.” In a recent interview with Quartz, Club M founder Chris Husong was quoted as saying that he markets his weed boxes “not for pot heads”, with a starting price of $100.

“Super Silver Sour Diesel Haze” vs “Marijuana Cigarettes”

So far, the Liberal government has taken a hard stance on the marketing, packaging, and branding of weed, insisting that it should closely follow advertising standards on tobacco products. This could very well affect the business model and price points of products from companies like Aphria, that are aiming to distinguish themselves in the legal marketplace.

“When you start cracking down on marketing, you are throwing quality, consumer information under the bus,” says Lester, who believes that the Liberal government is answering to people who think legal weed will eventually procure a Joe Camel-esque mascot, if not checked.

At the end of the day though, legal marijuana will end up operating like any consumer product in a free market, according to Jacob Securities analyst Khurram Malik.

“Prices could range from a few dollars a gram to several hundred dollars (i.e. a cosmetic anti-wrinkle cream), once such a product is approved for sale.”

Follow Vanmala on Twitter