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.