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Will Legalizing Marijuana Light Up Canada’s Economy?

Canada has become the first developed nation to legalize marijuana for recreational use, a decision spurred by broad public support in a country already known for its progressive stance on immigration, abortion, gay rights and other divisive issues. There were reports of crowds waiting in line for hours outside government-sanctioned retailers to buy the first legal joints and people lighting up in head shops and other public places, ending decades of stigmatization for casual users who had to hide their cannabis in fear of arrest.

Despite the buzz, the decision also comes with concern over how it will affect Canada’s politics and economy. The “green rush” is expected to grow into a US$5 billion industry, but legalization also forces down the market value of pot. In fact, marijuana stocks plunged on the first day of legal sales. Few physical stores are open so far, with most of the market based on mail order.

Under the federal act, adults are allowed to possess up to 30 grams of dried cannabis, which is enough to roll about 60 joints. They are also permitted to grow up to four plants per household. While the federal government has given the green light to cannabis, Canada’s 13 provinces and territories will be able to make their own rules about everything else regarding the substance. “Legalization of cannabis is the largest public policy shift this country has experienced in the past five decades,” Mike Farnworth, British Columbia’s minister of public safety, told The New York Times. “It’s an octopus with many tentacles, and there are many unknowns.”

Knowledge@Wharton invited two professors to help cut through the haze and bring clarity to the issue of legalized marijuana. Michael Armstrong is an associate professor of operations research at Brock University’s Goodman School of Business in Ontario, and Andrew Hathaway is an associate professor of sociology at the University of Guelph, which is also in Ontario. The following are five key takeaways from their conversation.

Legitimate Dealers Compete with the Black Market

Legalized marijuana will certainly contribute to Canada’s economy, but just how much remains to be seen. “There are all kinds of speculations and estimates,” Armstrong said. “Really, it is a grand experiment, and we are all going to find out.”

Illegal drug sales aren’t part of the formal economy, so the biggest financial change that comes with legalization is in accounting. Armstrong said the government is projecting a jump in economic activity, but that change reflects the official recognition of something that was once under the table.

The shift also puts the industry at a disadvantage, Armstrong and Hathaway said. Retailers — whether private stores, government-owned dispensaries or online outlets — must compete with a very established, very efficient black market with loyal customers.

“We are not talking about a new industry; we are talking about a newly legal industry.” –Michael Armstrong

“We are not talking about a new industry; we are talking about a newly legal industry,” Armstrong said. “It’s just like if I wanted to start up a new soft drink company in the United States, I would have to steal customers away from Coca-Cola and Pepsi.”

Hathaway said he’s seen figures suggesting that about a third of pot smokers will continue purchasing through their regular supplier. The “friendly neighborhood dealer” is a competitive threat likely to push down prices in the retail sector, he noted.

“If what has happened in the U.S. is any indication, the prices may go down as we continue on with the legalization experiment, which would make the government supply more competitive with what is available on the illicit market,” Hathaway said.

Greater Social Justice Through Cannabis

The legalization of marijuana has the potential to change the penal system because it decriminalizes the casual user. Hathaway said he’s already heard talk of pardons for those charged with small-scale possession and related offenses.

“Certainly, that looks promising from a social justice perspective,” he noted. “And I think it probably goes some way towards addressing the cynics who would argue that it is all about profit motive and not so much about the rights of users and charter protections and those kinds of things that the war on drugs has been criticized for a long time as an abject failure.”

Hathaway said money and other resources previously spent on stopping illegal marijuana sales and consumption can be redirected for other social needs. “I have heard upwards of three-quarters of resources devoted to the war on drugs have been targeting cannabis, so it certainly makes sense from a cost-saving perspective. It does make you wonder where the resources will be targeted now in terms of all of those elements of the criminal justice system that have variously been supported by war-on-drugs activity.”

The social aspect will also affect the business side, Armstrong said. With marijuana’s reputation transitioning from liability to mere vice, it will be curious to see how many shoppers become open about their consumption. Will they prefer the anonymity of online ordering, giving a boost to web-only vendors, or will they enjoy browsing through a shop?

“If you look at other retail sectors where many brick-and-mortar stores have struggled against big online retailers like Amazon, it is going to be interesting to see how that unfolds,” Armstrong said. “Which form of retailing is going to succeed? The perceived stigma may actually play into that.”

The Marijuana Business Is Learn as You Grow

The legalization of marijuana opens up opportunities for those interested in becoming retailers, but much like owning a restaurant, the odds of success are better for those with experience. That’s why some business schools are offering courses on the challenges unique to operating such a business. At Brock University’s Goodman School, the theme for the case competition this year is the cannabis industry. And the economics department is offering a short course on the drug industry.

“How do you start up a business, how do you do a business plan in an industry that is heavily regulated, has all kinds of unexplored, uncertain factors? That is what we are doing,” Armstrong said. “There is a community college [here], one of our neighbors, and they have actually started a botanical program for people who are already in the agriculture industry but now want to switch over from some other crop to cannabis. They are running a one-year certificate program on how to grow it, harvest it, take care of its various needs.”

Across Borders, Different Rules Apply

It will take provinces a while to establish their own laws regarding consumption of marijuana, now that the federal government has made it legal. Users are allowed to carry pot across provincial borders, but they will have to respect the rules about consumption in each jurisdiction. And carrying pot across the U.S.-Canada border is prohibited in both directions.

“If what has happened in the U.S. is any indication, the prices may go down as we continue on with the legalization experiment, which would make the government supply more competitive with what is available on the illicit market.” –Andrew Hathaway

“Even if you are crossing into Washington state, where at the state level it is legalized, the Border Patrol works with the federal government, and it is not legal,” Armstrong said. “You could have cannabis in your pocket in British Columbia on the north side of the border, you could have cannabis in your pocket in Washington state south of the border, but don’t have cannabis when you are crossing that border in either direction.”

Hathaway expects confusion as municipalities set up their own rules about marijuana. City leaders want the economic boon from pot, but not the political headaches.

“There are certain municipalities with different ethnic compositions, for example, more conservative views, anti-drug stances, anti-alcohol stances for that matter,” he said. “I think it will be a matter of whether it is something that is supported politically at the municipal level or not. So, lots of decisions need to be made at that level as well.”

Similar decisions will have to be made at the provincial and municipal level about fund allocation for activities related to marijuana, including policing.

“I live in Hamilton, Ontario, and I know there are a lot of nervous dispensary operators right now who have been threatened that if they don’t stop operations, then there is no way they are going to be allowed to apply for a license to become aboveboard,” Hathaway said.

Canada Could Rule the Cannabis World

Canada is the second country after Uruguay to legalize marijuana, and it’s the only developed economy to do so. That gives Canada a head-start in becoming the market leader worldwide, Armstrong and Hathaway said.

“The really big hopes for the really big growth is international,” Armstrong said. “I was joking with a colleague that the next time a U.S. president wants to renegotiate a trade agreement for the agricultural sector, we’ll say, ‘OK, we’ll let you have more access to sell milk in Canada, but we want to have access to selling our cannabis in the United States.’”

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