Ontario’s proposed model of selling weed is not the most cost-effective

The Ontario government has potentially missed out on an opportunity by choosing not to work with existing cannabis dispensaries across the province to sell weed to the public, according to an economist affiliated with the C.D. Howe Institute.

“We could have made these dispensaries legitimate taxable businesses,” Rosalie Wyonch, a policy analyst with C.D. Howe told VICE Money. “Competition between businesses keeps prices low, as opposed to having one government-owned entity that retails cannabis. Because prices would be lower, the government could levy a higher tax rate on weed.”

But as it stands, that’s not a scenario that’s going to see the light of day. The Ontario government announced Friday that it will completely control the sale of weed by opening up to 150 retail stores by 2020, in phases. The stores will be owned by a subsidiary of the Liquor Control Board of Ontario (LCBO), a crown corporation. Online sales of weed will also be operated by the LCBO. Weed will not be sold in existing LCBO stores, nor will it be allowed to be dispensed by private distributors.

As my colleague at VICE.com documented today, the proposed model of retailing weed has been met with much outcry from local marijuana dispensary owners, who have ironically been crucial in leading the charge towards the legalization of weed.

“We want to send a signal that the distribution model will be a controlled one,” declared Ontario Finance Minister Charles Sousa at a press conference this morning. “We are not encouraging the consumption of cannabis. That would be a mistake.”

Wyonch believes that the government’s reasoning for not incorporating existing cannabis stores into their retail model is simply a matter of optics. “They don’t want to be seen to be rewarding businesses that have acted illegally. Though that is a reasonable ideological stance, it’s a missed opportunity,” she said.

A 2014 paper from the C.D. Howe institute, showed that the lack of competition in Ontario’s system for retailing alcohol causes higher prices for consumers and “foregone government revenue”. The paper compared Western Canadian provinces with more competition and found that they had seven percent more per capita in provincial alcohol profits than provinces with government-run monopolies.

As with the LCBO, all profits that come with the sale of weed in government-owned stores will flow into the coffers of the Ontario government. But because the government is intent on wiping out the black market, they will have to cautious in determining the price, and taxation of weed

Incorporating dispensaries into the retail equation, argues Wyonch, will enable the government to have more flexibility on taxation because lower prices leave more room for higher taxes. “A provincial retailer will inevitably have little incentive to keep prices low. It’s definitely possible they could have gotten the same, if not more revenue by allowing competitive retail.”

Meanwhile, investors reacted positively to the proposed retail model. Shares of Canopy Growth Corp., rose as much as five percent during the day, while Aurora Cannabis gained roughly two percent in increased stock value and Aphria Inc., climbed by 2.5 percent.

“It’s happening and it’s clear and it’s remarkable there’s no question that it’s going to happen,” Canopy Growth CEO Bruce Linton told Bloomberg News earlier today.

“It sound very promising and it’s great news for investors,” said Alan Brochstein, a marijuana industry analyst based out of Houston, Texas. “They are going to step up enforcement, and that’s a good thing. Illegal dispensaries are a problem for the big LPs in Canada.”

Indeed today’s announcement is a boon for weed’s largest players — companies like Canopy Growth Corp., Aphria Inc., Aurora Cannabis and Tilray will end up being the main suppliers of weed to government-owned stores.

“It’s kind of like beer. The largest breweries own and supply to the Beer Store. This government-owned retail model for weed will protect the current monopoly and market power big LP’s have,” says Wyonch. “Companies that are already in the market love these barriers to entry.”

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