Here is a summary of forthcoming work by Gary Becker, Michael Grossman, and Kevin Murphy:
In an important new study, world-renowned economists–including a Nobel
Prize winner and a MacArthur "genius"–argue that when demand for a
good is inelastic, the cost of making consumption illegal exceeds the
gain. Their forthcoming paper in the Journal of Political Economy is a
definitive explanation of the economics of illegal goods and a
thoughtful explication of the costs of enforcement.The authors demonstrate how the elasticity of demand is crucial to
understanding the effects of punishment on suppliers. Enforcement
raises costs for suppliers, who must respond to the risk of
imprisonment and other punishments. This cost is passed on to the
consumer, which induces lower consumption when demand is relatively
elastic. However, in the case of illegal goods like drugs–where demand
seems inelastic–higher prices lead not to [TC: much?] less use, but to an increase
in total spending.In the case of drugs, then, the authors argue that excise taxes and
persuasive techniques –such as advertising–are far more effective uses
of enforcement expenditures."This analysis…helps us understand why the War on Drugs has been so
difficult to win…why efforts to reduce the supply of drugs leads to
violence and greater power to street gangs and drug cartels," conclude
the authors. "The answer lies in the basic theory of enforcement
developed in this paper."
Here is an earlier version of the paper.
Gerry Swanson at the University of Arizona has been using this example in his introductory economics courses for over two decades to explain the importance of elasticity.
Slocum, while your comments may be completely correct, I have my doubts that it explains why many people vote for those who who favor the current approach. I suspect willful ignorance is a much more powerful explanation.
Maybe I’m missing something, but while I am no big fan of the
“war on drugs” approach, isn’t the answer built into the model here?
If demand is assumed to be inelastic, then by definition high prices won’t cut consumption. What am I missing that is novel?
GHanner – “In the case of illegal drugs research indicates that the brain develops a dependency for whatever the substance happens to be.”
What an ignorant statement. First off, there are 101 drugs, belonging to various classes, with vastly different addictive potential and health risks. (check my blog for a British govt. report on drugs). All “drugs” have in common is that they’re illegal and get one ‘high’. Barring drugs like crack, the vast majority of people who try drugs don’t become addicts. Just as the ONDCP czar said, 15% of cocaine users consume 80% of the cocaine. Drug demand is inelastic w.r.t. prices for this group. For the remaining 85%, high prices are a deterrence to regular use, but not occasional use. Drug addicts are rational players. They crave avoidance of withdrawl (in case of opiates) and/or the intoxication above the price for the drug, because of the immediacy of the craving. The key question here is, whether the cost of letting addicts have their drugs legally is higher than the cost of prohibition-induced crimes and law enforcement costs and social indoctrination programs and prison costs. The answer, according to legal heroin maintenance programs in Netherlands & Britain, is No (for heroin). For stimulants like crack and meth, the answer is trickier, and may well be Yes, but that’s not firm.
Addendum: In case of amphetamines, the history of Swedish drug control reveals an interesting story. In short, amphetamines were prescribed but liberally, starting in 1938. In 1944, restrictions were applied. In late 50s, they were made equivalent to narcotics (i.e. opiates). The nature and prevalence of amphetamines use tells an interesting story via this image @ Imageshack : http://img518.imageshack.us/my.php?image=ampsweden6xw.jpg
Is there anything new or original in the article that hasn’t been known for a long time?
but property crime rates are high in countries that have legalized drugs.
Like which?
Wouldn’t this imply that an enforcement effort against consumers, rather than producers, might be much more effective?
If the risk of prosecution, fines, and imprisonment were borne by consumers rather than producers/sellers, then the increased cost due to drugs being illegal would translate into lower prices rather than higher prices.
Holding demand constant, increasing the “price” by imposing legal penalties (costs) on the consumers would reduce the amount they would be willing to pay the sellers. Assuming supply is elastic (which it probably is, if drug dealers care about money not drugs, since there are alternative sources of money), then the quantity supplied would be lower.
So, a demand-side “war on drugs” might be successful, but the supply-side “war on drugs” is doomed to failure.
The Netherlands.
Ted Craig (TC) – “If the government legalizes but rations drug sales, many users will still have a need that exceeds the ration.”
I don’t see the point of rationing drug sales. Alcohol sales aren’t rationed. Like you say, the ration won’t stop the addictive personalities, and is an unnecessary instrument for those able to obey it.
TC – “Currently, an open market sets the price.”
An unregulated, underground market is not an open market. Unlike regulated markets, if you don’t like your competitor underpricing you and if you have the muscle, you take him out, not lower the prices. Jeffrey Miron, of Boston U., who specializes in drug war economics, estimates that the current street price of cocaine is 4 times what its after-tax retail price would be in a legal market. 15 times for cannabis, and between 8-19 times for heroin, depending on the locale. Cigarette smuggling exists, but accounts for only 5-6% of traded cigarettes by volume, according to the WHO. The markup on drugs happens at the distributor and retail stage. Again, lookup the report on my blog (click on my username).
TC – “While most people may not become cocaine addicts just by sampling the powder, how many more would become addicted if the supply was cheaper and more available?”
The proportion would decrease somewhat. People with impulsive and thrillseeking personalities are prime candidates for addiction. The small segment of the population that dabbles in illegal drugs tends to have higher representation of such personalities compared to the overall population. Check my second post for statistics on amphetamine usage in Sweden. A legal market doesn’t mean a market free of regulation, including social oppobrium.
TC – “The property crimes are pervasive across society. So the question becomes one of sacrificing a portion of society to make the quality of life better for others.”
Most property crimes committed by addicts to support their habit, are a result of the (artificially) high prices.
Your example about proving drug use is strange, considering that in most American jurisdictions, unlike Scandinavia, drug use is not a crime. Drug possession is. Your scenario might occur if Joe was on probation or parole.
I am afraid that the assumptions made by Becker et al. have essentially the same strength as their conclusions, so that this exercise is not much use as a policy paper. Details here: http://stonecity.blogspot.com/2006/01/theory-of-illegal-goods.html
I agree that attacking supply, the DEA’s approach, is inefficent. Directly attacking the casual user, frightening him away through the use of shame and the threat public humiliation and its consequences, has worked to clean up neighborhoods effectively. Seriously addicted users lack the means to meaintain the drug market. It works with prostitution, it would work here as well.
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