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October 16, 2018

On Oct. 17, Canada will be the second country in the world to have fully legalized production and retail distribution of recreational marijuana. There will be considerable international interest in the Canadian experiment, in order to understand what works and what does not. One of the prime objectives of legalization was to stamp out the black market. However, it is now clear that this is extremely unlikely. Both federal and different provincial governments should accept responsibility for this.

Black markets exist if there is insufficient legal supply or if they can offer comparable goods at lower cost. Based on available data on the number of licensed producers and medical-marijuana production and inventory levels, we estimate that legal supply will at most meet 30 per cent to 60 per cent of total demand in the first year of legalization. This is simply because a sufficient number of producers were not licensed a year ago. It takes six to nine months for a licensed producer to be able to supply the retail market.

Further, it is now clear that insufficient supply may not be the only source for thriving black markets across the country. There will be a significant lack of retail bricks-and-mortar stores in Canada’s largest provinces. Ontario will only have retail stores from April, 2019, onward. British Columbia will only have one store open on Oct. 17. Alberta is only slightly better positioned with 17 retail stores, but still far from sufficient. It is true that the situation will be much improved in a year. While Ontario has indicated that it does not intend to cap the number of stores, Alberta expects to have 250 stores operating within about a year.

However, the initial lack of retail stores could have severe ramifications. There will be many consumers who will be interested in trying marijuana products for the first time. It can be argued that, for such consumers, convenient access to legal retail stores and the ability to ask questions are important. Many provinces are hoping that their websites will be able to fill this void. But they will have to compete with well-established black marketers who have very successfully harnessed technology. There are many examples of websites and apps such as www.weedmaps.com that allow prospective consumers to browse different retail storefronts or delivery services and compare products, prices and customer reviews, locate sellers by neighbourhood and opt for home delivery. In some major cities, home delivery is possible in a few hours. Further, these websites often offer products such as edibles, which will not be available during the first year of legalization. If a consumer does obtain satisfactory products and service through such apps, the probability of switching to legal sources is reduced.

Ontario and British Columbia have particularly contradictory policies. Both provinces have confirmed that there will be no cap on the number of retail stores, but have also given municipalities the choice of opting out of having cannabis stores within their boundaries. If the objective of having no caps is to ensure convenient access and reduce the presence of the black market, it makes no sense to allow municipalities to choose whether to have cannabis stores. As a result, there will likely be a skewed distribution of retail storefronts across different regions. This could be somewhat mitigated by the availability of online ordering, but whether online retail is competitive and convenient remains to be seen. Another relevant question is whether the province will be able to process the sheer magnitude of online orders.

In summary, all levels of government must share responsibility for a continuing black market. Some provinces such as New Brunswick and Nova Scotia should be recognized for having a reasonable number of stores ready to open and giving consumers a good idea about what to expect. Other provinces are not as prepared. Municipalities should not consider opting out of having retail stores. This might actually lead to worse outcomes. However, the biggest criticism should be directed toward the federal government. It has given little direction to provinces, in terms of ensuring a sufficient number of retail stores and consumer convenience, and to municipalities in designing regulations on zoning of retail establishments and consumption in public places. Allowing lower levels of government the flexibility in choosing the best models makes sense from one perspective. But this could have been done along with explicit guidelines on certain minimum objectives and best practices.

Anindya Sen is professor of economics and director, Master of Public Service Program, Department of Economics, University of Waterloo. Rosalie Wyonch is a policy analyst at the C.D. Howe Institute.

Published in the Globe and Mail