Mandatory Minimums and Drug Quality

A per unit tax tends to increase product quality as consumers and manufacturers substitute away from the taxed margin (quantity) towards the untaxed margin (quality) (see here for evidence on cigarettes, beer, and grapes and lobsters). The principle is quite general. Teenagers, for example, drink less often than adults but when they do drink they tend more often to get drunk. Similarly, Ronald Davies finds that mandatory minimums increased drug purity.

As of 1987, the US’s Anti-Drug Abuse Act (ADAA) has imposed mandatory minimum sentences for drug traffickers based on the quantity of the drug involved irrespective of purity. Using the STRIDE dataset and a differences-in-differences approach, I find that this led to increases in cocaine and heroin purity of 52 per cent and 27 per cent respectively.

Lesson two of economics is think on the margin. Lesson nineteen, which we don't always get to in Econ 101, is to remember that there are many margins.

Hat tip to Geary Behavioural Economics Blog.


Skimming through the paper, I don't see any comparative analysis featuring European trends in drug purity.

Following up from the per unit tax idea, perhaps we should tax and assess drug dealers based on the characteristics of their clientele. So, if you sell to a minor, you not only get a mandatory minimum, but also get assessed for the costs of drug treatment. This would discourage solicitation of new, younger customers. Perhaps we could even create a private right of action of the drug buyer to sue the drug seller for rehabilitation costs. This would also discourage sales to unstable individuals. (We would also have to immunize the person commencing the suit, but that could be worked out. So, now you would have an incentive of the user to turn himself in order to get money from the perpetrator and help in ending the addiction.)

Correction, or addendum, for this to work the tax needs to have a per-unit element, not hard to imagine if you include restrictions on layoffs or the like as a per-unit cost.

I'm generally a fan of the Alchian-Allen theorem but I'm not sure that this actually goes with how drug markets actually work. In Against Excess, Kleiman says that drugs are sold in standard quantities at standard prices in order to reduce transaction costs associated with the furtive retail transaction. Price fluctuations at wholesale then get translated into retail in terms of purity. Kleiman's preferred explanation for why purity-adjusted retail prices are falling (ie, street purity has gone up) is that at the wholesale level swamping enforcement capacity does weird things to the supply curve.

Bottom line, I guess I'm saying that institutions matter, especially when there are high transaction costs. Note that market fundamentals should be especially powerful when a new market develops, unencumbered by custom, as is the case with the recent expansion of heroin markets by a new set of dealers (Mexicans from the town of Xalisco) selling a new type of heroin (black tar) at different standard prices (cheaper) to a new set of customers (rural whites graduating to heroin from diverted pharmaceutical opiates).

Not sure I buy that beer article either. They're missing a large selection of craft beer from the analysis.

yo Craig,

"People don't always respond to incentives in the ways you might predict. What distinguishes good economic thinking from bad is recognition of the subtle, creative, and often unforeseen ways that people respond to incentives."

This is a direct paraphrase of Bastiat's "The Seen and the Unseen"

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."

This is a good,common sense article.Very helpful to one who is just finding the resouces about this part.It will certainly help educate me.

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