Legalization of Recreational Marijuana in Canada: Implications from Provinces’ Price Difference

Abstract

Due to the positive and negative returns that may come with marijuana legalization, it is of prime importance to assess the interdependence that might be generated at the provincial level. Specifically, how can the provincial price difference affect the level of consumption and violent criminal code violations within each province and in neighboring regions. So, investigating whether there is a spatial dependence that might generate spillover effects will reveal how can a province and/or its neighbors benefits from the price difference or to which extend it can be prejudicial. I analyzed the effect of variations in price of medical and non-medical marijuana in thirteen Canadian provinces including territories from 2011 to 2016 using panel data with 65 observations. The results although sensitive to alternative specifications and models, showed a constant pattern. On one hand, an increase in the price of medical marijuana increases the demand for non-medical marijuana in neighboring areas whereas, an increase in the price of non-medical marijuana reduces its demand in neighboring provinces. Thus, the variable non-medical cannabis does not exhibit the expected bootlegging behavior. On the other hand, the variation in one element of justice namely total violent criminal code violations is very sensitive to the functional form of the variables. While the logarithmic specification did not capture any spatial dependence in the variables, the percentage change modelling showed that an increase in the price of medical marijuana in one region leads to an increase in the total transgressions in neighboring regions whereas, an increase in the price of non-medical marijuana in one area decreases the number of violent criminal code violations in neighboring areas. These results on quantity demanded of non-medical marijuana and total violent criminal code violations complement each other.