THE ECONOMIC COSTS OF CANADA’S WAR AGAINST CANNABIS

MORAL CASE

A moral case against drug prohibition might take several forms. Milton Friedman, for example, has argued that the war on drugs and prohibition in general offends against our personal sovereignty, and is analogous to the censorship of ideas: “The question is whether the government should have the right to say what you may put in your mouth any more than it has the right to say what you may put in your mind.”1 We can call this the sovereignty argument, but its pedigree is more easily recognized as the argument from self-ownership.

Alternatively we might insist that while the government does have a “right” to attempt to ameliorate self-caused harms, marihuana just is not sufficiently harmful to be prohibited. Call this the harm assessment strategy. The harm assessment strategy would include criteria for judging something sufficiently harmful to be subject to prohibition. It is very difficult to believe that marihuana, in any of its forms, would even come close to some rational criteria for prohibition. And if it does not meet the criteria, then putting people in jail, or even giving them a ticket or fine, for smoking pot is harming them for no good reason. Since harming persons for no good reason is immoral, marihuana prohibition according to the harm assessment strategy is immoral.

This article, however, does not attempt to make the above strictly moral arguments against the prohibition of marihuana. Instead, it will focus on the economic costs of keeping marihuana illegal, and attempts to make the economic case for re-legalizing marihuana. This is not to say that an economic case for marihuana re-legalization is not simultaneously a moral case, of course it is. An efficient health care system means fewer deaths. An efficient economic system means people are better off — they get more of what they need or want, at a cheaper price.

Decisions about how to spend scarce police and legal resources are moral questions. If we spend one dollar on ensuring that Jones does not smoke pot, that’s one dollar less to ensure that Smith does not have her car stolen, or gets it back should someone make off with it. Rational public policy requires dealing with the opportunity costs of spending a dollar here rather than elsewhere; rational public policy demands that we deal with trade-offs between policy priorities.

So it is a moral question that we are facing. And there is every reason to believe that keeping marihuana illegal is not just immoral, it’s deeply, profoundly irrational. From a rational public policy perspective, marihuana prohibition is, to be charitable, unwise. It may very well be the most unwise public policy around. At least, it is difficult to find public policies that cost so much, benefit us so little, and destroy as many lives as marihuana prohibition. Or so I will argue.

COSTS AND BENEFITS

How much marihuana is being circulated in Canada? The exact numbers are difficult to pin down. What we do have, however, are reports on the amount of marihuana seized in Canada, polling data on use, as well as estimates by various groups, including the 2002 Senate Special Committee Report on Illegal Drugs.

The United Nations issues an annual World Drug Report. The latest 2008 report states that, in 2006, law enforcement in Canada seized 13154.075 kg [13.2 tonnes] of cannabis herb,2 47594.279 kg [47.6 tonnes] of cannabis plant,3 and 27730.066 kg [27.7 tonnes] of cannabis resin.4 The Royal Canadian Mounted Police issues an annual Drug Situation Report. The most recent version available is the 2007 Drug Situation in Canada report. According to the report, “an estimated 50,000 kilograms [50 tonnes] and over 1.8 million marihuana plants were seized in Canada” in 2007.5 Approximately 90 per cent of the marihuana seized was seized from the provinces of Quebec, Ontario, and British Columbia.

Chart 1: Cannabis seizures in Canada

The Drug Report estimates the total street value of all seized cannabis and cannabis derivatives (marihuana plant, marihuana herb, hash, and hash oil) at $2.3 billion dollars. Since the total street-level value of all illicit drugs seized by Canadian law enforcement was estimated at $2.6 billion, marihuana and its derivatives represent the overwhelming majority of seizures.6

Relying on the annual Drug Report data, the 2002 Senate Special Committee Report on Illegal Drugs concluded that approximately 800 tonnes of cannabis circulates in Canada. The Senate report suggested that approximately 50 per cent of this total is Canadian-made. That yields an annual 400 tonnes of cannabis produced in Canada for circulation. Assuming that these numbers remained constant through to 2007, the ratio of seized to delivered cannabis is 50 out of 800 tonnes, or 6.25 per cent.

The Senate report suggested that the amount of cannabis circulating in Canada is greater than the 800 tonnes figure. There are at least two good reasons to believe that the amount of cannabis circulating in Canada is greater, possibly much greater, than the 800 tonnes cited.

For one, the staggering proportion of Canadians telling pollsters that they have tried or continue to use marihuana strongly suggests a larger figure. According to the 2004 Canadian Addiction Survey published by the Canadian Centre on Substance Abuse, 14.1 per cent of all Canadians reported using cannabis in 2003 — nearly double what was reported in 1994 at 7.4 per cent — while 30 per cent of 15- to 17-year-olds, and 47 per cent of 18- to 19-year-olds reported using cannabis in 2004. Nearly half, 44.5 per cent, reported using cannabis at least once in their lifetime. The 2007 UN World Drug Report had 16.8 per cent of all Canadians using marihuana in 2006, the highest amongst developed countries.

Secondly, the Senate Report was making calculations on the basis of figures obtained earlier than 2002, when they issued their report. Given the upward trend of use in Canada, as well as an increase in population, this suggests that cannabis availability has increased as well as demand.

COST OF PROHIBITION: LOST POTENTIAL TAX REVENUE

Depending on taste preferences, one gram of marihuana produces between one and three marihuana cigarettes, according to Stephen T. Easton’s analysis for the Fraser Institute.7 That means the average marihuana consumer is willing to spend between $3.33 to $10 per marihuana cigarette, assuming a street value of $10 per gram, as the RCMP does. A standard tobacco cigarette has 0.8 grams of tobacco per cigarette. If all marihuana cigarettes were made just like tobacco cigarettes, that would result in retail prices of $8 for a marihuana cigarette, and $160 per pack of marihuana cigarettes at 20 cigarettes per pack, holding commodity price constant at $10/gram.

Stephen T. Easton has estimated that it costs approximately $4.70 to produce one gram of marihuana using 2002 production methods and techniques, in an illegal market. At wholesale prices, each marihuana cigarette would cost between $1.60 to $4.70 to produce,8 or $3.76 at 0.8 grams, the amount of tobacco in tobacco cigarettes. That yields $5.30 in profit for every gram, $4.24 in profit for every 0.8 grams. This amount is available for taxation.

In what follows, I have made use of three different assumptions to estimate the size of the domestic marihuana market, and to generate the amount of revenue open to taxation. The first method is to assume half of the marihuana in circulation is consumed annually; the second is to update Easton’s calculations for the Fraser Institute with more recent data about population size and the proportion of Canadians who use marihuana; while the third takes Jeffrey A. Miron’s calculations for the U.S. marihuana market and applies a crude conversion based on population size to generate potential revenues in Canada.

If half of the marihuana in circulation were consumed by Canadians (400 tonnes), and if taxes consumed the profits, that would yield an astonishing $2.12 billion in revenue every year.

The above estimates of production costs are conservative. It is much more likely that the cost of production would dramatically decrease if marihuana were legalized. Let us conservatively estimate that production costs would be halved. Let us further assume that we don’t want increases in consumption, so we adjust the tax to compensate for a decrease in production costs. Using these assumptions, we can expect $3.06 billion in revenue.

Alternatively, we can use the cost of producing medicinal marihuana for Health Canada as our guide. Prairie Plant Systems Inc. produces marihuana for Health Canada, charging the government $328.75 per kilogram (Health Canada charged patients $5,000 per kilogram, or $150 per 30 gram bags, or $5 per gram, a 1,500 per cent markup) in 2007, according to documents obtained under the Access to Information Act by the Toronto Star. That means a cost of $0.33 per gram. At a cost of $0.33, that would yield $3.87 billion in taxable revenue, or $3.95 billion in 2009 dollars.

Easton used different methods to come to similar usage statistics. Easton took the number of users of marihuana in Canada and made assumptions about how many marihuana cigarettes they smoked per month (18.7), multiplied that number by the weight of each cigarette (0.4 to 1.0 grams), and, for the year 2000, came up with 159.4 tonnes as the low figure (assuming 0.4 grams per marihuana cigarette), and 413.4 tonnes as the high figure (assuming 1.0 gram marihuana cigarettes). That would yield $1.22 billion (low) to $3.16 billion (high) of revenue open to taxation in 2004 dollars, or $1.33 billion (low) to $3.46 billion (high) in 2009 dollars.

We can adjust Easton’s measurements to account for the higher population and usage statistics in 2006. Easton used 7.4 per cent of the Canadian population as having used marihuana, data consistent with 1994 figures. In 2006, however, rates of use in Canada have more than doubled, at 16.8 per cent of the population, according to the UN’s World Drug Report. Since the Canadian Addiction Survey may be a better gauge of use, we will use the 14.1 per cent of all Canadians 15-and-older figure obtained in 2004. Canada’s population was 31.9 million in 2004, giving us 4.5 million users. Per Easton’s assumptions, these users smoked, on average, 18.7 marihuana cigarettes per month, giving us a domestic marihuana market of 404.3 tonnes (low) or 1,010.6 tonnes (high). That yields taxable revenue of $3.14 billion (low) to $7.73 billion (high) in 2004 dollars, or $3.44 (low) to $8.46 billion in 2009 dollars.9

A third method might be to use U.S. consumption and expected revenue figures, and adjust them for Canada. Jeffrey Miron estimated that the U.S. government could expect annual revenue from taxes at US$6.7 billion. Miron arrived at this figure by using the 2000 estimates of total expenditure on marihuana by Americans provided by the Office of National Drug Control Policy, and assuming a tax rate similar to taxes levied on alcohol and tobacco. The ONDCP estimates that US$10.5 billion was spent by Americans on marihuana in 2000 [p. 3], which would be US$12.6 billion in 2006, after adjusting for inflation. Meanwhile, taxes represent 24.5 per cent of total alcohol cost, and 61 per cent of tobacco costs [Miron, p.14]. Miron therefore assumes that taxes would account for 53.2 per cent of the total cost of marihuana. Assuming rates of use for Canada and the U.S. were identical, Canada could expect revenue of US$670 million per year, or CAD$717 million (U.S. expected tax revenue divided by 10), or CAD$748 million adjusted for inflation.

This last method may significantly underestimate the potential tax revenue in Canada. For one, Miron assumes that expenditure on marihuana has remained constant from 2000 through 2006. This is unlikely. Secondly, Canadians consume more marihuana than Americans. According to the ONDCP, 12.6 per cent of Americans reported using marihuana in 2001, compared to 14.1 per cent of Canadians in 2003, and 16.8 in 2006 (the highest rate amongst all developed nations). Finally, there is some reason to believe that Canadians will tolerate higher tax rates. Assuming taxes accounted for 76.5 per cent of total costs (as we earlier assumed after production costs were halved), we could expect $1.06 billion in revenue, or $1.11 billion adjusted for inflation.

That gives us a range of $748 million to $8.46 billion in potential revenue open to taxation. The lowest and highest numbers are very unlikely. Excluding those (as well as the $3.95, $3.46, and $3.44 billion figures, to be conservative), we have a range of $1.33 to $3.06 billion in annual revenue open to taxation. This number does not include potential additional revenue from increased tourism, which would be very likely (especially from the U.S.). Since we excluded the highest number, which assumed increased consumption, we are also not accounting for any possible increase in consumption, which is also likely. This range is conservative. It can be restated as: $2.195 billion +/- $865 million.

Chart 2: Expected revenue

(Inflation calculator: http://www.bankofcanada.ca/en/rates/inflation_calc.html)

Some might object that fewer people will consume marihuana purchased in the legal, taxed environment, and will continue to use black market, or illegal marihuana, or grow their own. There is no reason to believe this. First, we have assumed black market prices at $10/gram. Given the option of buying regular or black market marihuana at the same price, there is no reason for someone to choose the black market. While people could grow their own marihuana, there is no reason to believe that this would take up anything but an insignificant proportion of the whole. People can currently grow their own tomatoes and cucumbers, but few do. Similarly with tobacco, which is a weed just like marihuana. The most obvious comparison is to alcohol, which saw a switch from home-made booze to professionally-produced alcohol almost immediately after repeal of prohibition. With the assurance of quality and the decrease in potential violence that comes from a legal regime, we can assume that nearly all marihuana will be purchased in the legal and taxed environment, rather than in the illegal, or homegrown, and untaxed market.

COST OF PROHIBITION: ENFORCEMENT TRADE-OFF

In addition to expected tax revenues of between $1.33 to $3.06 billion per year, we would see significant law enforcement savings as well.

It is difficult to estimate the total cost of enforcing marihuana laws in Canada. There are many reasons for this. It is difficult, for example, to estimate the percentage of time a regular police officer spends on marihuana-related enforcement activity, compared with her other police activities, when out on patrol.

But we have to do the best we can, with the evidence we have at our disposal. In 2001, the Auditor General of Canada estimated that federal law enforcement agencies spent $450 million between 1999 and 2000 on drug control, enforcement, and education, with 95 per cent of the costs attributed to enforcement alone. For enforcement only costs, the Auditor General reported the following break down by enforcement activity:

Canada Customs and Revenue Agency: $10 to $32 million

Correctional Services Canada: $169 million

Department of Justice: $71 million

National Parole Board: $4 million

RCMP: $168 million

Total enforcement cost: $422 to $444 million.

Further, according to the Auditor General, 34,347 persons were charged with cannabis-related crimes — including possession (21,381), trafficking (8,112), importation (157), and cultivation (4,697) — out of a total of 49,585 persons charged under the Controlled Drugs and Substances Act in 1999. Cannabis-related charges therefore represent 70 per cent of all persons charged in 1999.

Assuming an efficient distribution of enforcement expenditure to persons charged, we would expect that federal law enforcement agencies spent 70 per cent of their law enforcement budget on cannabis-related crimes. That would yield a total of $295.4 to $310.8 million in cannabis-related enforcement costs in 1999, or $8,600.46 to $9,048.83 per person charged. This figure includes the estimated annual cost of housing prisoners, which is approximately $57,000 per year in provincial jails, and $88,000 per year in the federal system. Adjusted for inflation, we get a total enforcement cost of $363.7 to $382.7 million, or $10,590.19 to $11,942.29 per person charged in 2009.

Assuming a constant cost-per-person-charged rate, we can estimate more recent costs of cannabis enforcement. According to Statistics Canada, the number of persons charged with cannabis-related offences under the Controlled Drugs and Substances Act has fluctuated significantly from 1999 to 2007, 2007 representing the most recent data available. From a high of 41,128 persons in 2002, to a low of 29,503 in 2005. In 2007, 32,472 persons were charged with cannabis-related charges. At $10,590.19 per person charged, we get $343.9 million in cannabis-related enforcement costs in 2007, and at $11,942.29 per person charged, we get $387.8 million. The following chart provides us with detailed figures for all cannabis-related charges from 1999 until 2007, as well as estimated cannabis-specific law enforcement expenditures using the above crude estimate (notice that Statistics Canada provides a different number for persons charged in 1999 than the Auditor General’s report. I am not sure which numbers are correct).

Chart 3: Cannabis-related charges



In total, a legal marihuana regime would see cannabis-related enforcement cost savings for federal law enforcement agencies between a low of $312.4 million (using 2005 estimates) to a high of $491.2 million (using 2002 estimates) per year. That money could be diverted to other law enforcement priorities (most likely), spent on other priorities like health or education (less likely), or returned to taxpayers in the form of tax cuts (unlikely). These numbers should be treated with some caution. This is because many costs associated with cannabis are dealt with at the provincial level, and we can anticipate continued costs, like roadside testing for drugged driving. The significance of this cost to the total, however, is likely negligible.

SOCIAL COSTS OF LEGAL MARIHUANA

To accurately assess the economic case for marihuana legalization, we need to look not just at potential tax revenue and potential law enforcement savings, we need to also assess the potential social costs of marihuana use.

According to the Canadian Centre on Substance Abuse’s The Cost of Substance Abuse 2002, the social cost of substance abuse, including alcohol, tobacco, licit and illicit substances, is approximately $38.9 billion dollars,10 or $44.5 billion in 2009 dollars. They break these costs down as follows. Indirect costs, in terms of productivity loss, amount to $24.3 billion, or 61 per cent of the total cost. Direct health care costs amount to $8.8 billion, or 22 per cent of the total. Direct law enforcement costs are set at $5.4 billion, or 14 per cent, while other direct costs are estimated to be $1.3 billion, or three per cent.

According to the study, tobacco accounted for $17 billion of the total cost (42.7 per cent), while alcohol accounted for $14.6 billion of the total cost, (36.6 per cent), leaving $8.2 billion (20.7 per cent) attributable to all illegal drugs. We will adjust for inflation after figuring out the numbers in 2002 dollars.

We need to know what proportion of the $8.2 billion ($8,224.3 million) in social costs is attributable to marihuana, and what cost we could expect if marihuana were re-legalized. Direct law enforcement costs from all levels of law enforcement (including federal) come to $2,335.5 million, according to the study. If marihuana were re-legalized, cannabis-specific enforcement costs would be negligible. Subtracting the total law enforcement costs from $8,224.3 million gives us $5,888.8 million, or $5.9 billion still to be distributed.

Direct health care costs amount to $1,134.6 million for all illegal drugs. In a separate study using the same data as The Cost of Substance Abuse 2002 study, the Canadian Centre for Substance Abuse revealed the cannabis-specific health care costs as $73 million per year, while all other illegal drugs accounted for $1,061.6 million, or $1.06 billion (a surprising ratio of 14.54 to 1).11 Of the $5.9 billion total social costs still to be distributed, we can eliminate $1.06 billion as a health care cost due to non-cannabis illegal drugs, while putting aside $73 million as a definite health care cost of cannabis. Subtracting both numbers from the total, we get $4,754.2 million, or $4.8 billion still to be distributed.

Productivity loss caused by all illegal drugs is $4,678.6 million. The study uses two primary methods of inferring productivity loss — death and morbidity (potential years of life lost plus acute care hospital days). The most significant portion of this figure is due to “long-term disability” at $4,408.4 million, with “premature mortality” at $248.5 million. Apart from driving-related deaths, no death has ever been attributed to the use of cannabis. We can use the direct health care cost numbers as a proxy for indirect productivity loss due to “long-term disability.” At a constant ratio of 14.54 to 1, we get $303.2 million as a result of “long-term disability” for cannabis only. We can assume that this is the only significant cost in terms of productivity loss due to cannabis only.

These findings are consistent with the conclusions of the 2002 Senate Report, which surveyed the findings from the 1992 study by the Canadian Centre for Substance Abuse, and concluded that, “Except in the case of traffic fatalities, cannabis is not a cause of death and involves none of this type of social cost. Morbidity corresponds to losses attributed to problems caused by drug use as measured by the difference between the average annual income of users and of the population in general. Here, two further observations about cannabis should be noted. A large proportion of cannabis users are young people who are not yet part of the workforce; and cannabis use involves none of the addiction and attendant problems that follow from heroin or cocaine use. It is, therefore, the costs that can be attributed to cannabis in this regard are likely minimal. If one accepts the methodology of the authors, cannabis in itself entails few externalities, which are the main measures of the social cost of illegal drugs.”12

We are now left with $75.6 million after subtracting the total productivity loss costs from the remaining $4,754.2 million. This amount falls into categories like awareness, education, and research, thus it is not possible to further break down this figure.

The total cannabis-only social costs, then, are $376.2 million, plus some proportion of $75.6 million. $451.8 million represents the absolute upper bound in terms of social costs, assuming that all of the “other costs” were cannabis-specific. Adjusting for inflation, we get a total of anywhere between $430.65 to $517.19 million.

Chart 4: Expected social cost of legal cannabis

CONCLUSION

Maintaining prohibition of marihuana costs the Canadian government $1.33 to $3.06 billion in lost taxable revenue (or, $2.195 billion +/- $865 million), and approximately $400 million in law enforcement costs. Meanwhile, the social costs of marihuana are minimal, estimated at between $430.7 to $517.2 million per year. Considering only domestic costs and benefits, the decision to continue to keep marihuana illegal is, from an economic point of view, profoundly irrational.

Adding to the irrationality is the fact that, currently, criminal gangs are seeing the benefits of marihuana prohibition through an enormous revenue stream provided by the prohibition on marihuana. We could expect the same devastating impact on criminal gangs with marihuana re-legalization as we witnessed after the re-legalization of alcohol. Marihuana prohibition enriches gangs. Small wonder gangs in Canada approve of prohibition, and hope that marihuana remains illegal.

This article has not considered what may be the most significant cost of re-legalizing marihuana — impact on our trade relationship with the United States. Research should be undertaken to estimate the potential U.S./Canada trade-related costs of re-legalizing marihuana in Canada.

Peter Jaworski is a PhD Candidate in Philosophy at Bowling Green State University and a Director of the Institute for Liberal Studies (www.liberalstudies.ca). He holds an MSc from the London School of Economics and an MA from the University of Waterloo.

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