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http://www.econlib.org/library/Columns/y2013/Powelldrugs.html
The late Nobel Laureate James Buchanan was known to say, "Economics puts limits on people's utopias." Unfortunately, the advocates of the U.S. government's war on drugs have failed to appreciate the economics underlying the drug war that makes their utopian vision impossible to achieve through drug prohibition.
Although the Obama administration has softened the rhetoric of prior administrations by talking about treatment rather than an "enforcement-centric 'war on drugs' approach,"1 enforcement budgets remain large and penalties for distribution severe. As for legalization, the administration claims that "drug legalization also runs counter to a public health and safety approach to drug policy. The more Americans use drugs, the higher the health, safety, productivity, and criminal justice costs we all have to bear."2
Regarding violence, in a recent speech in Mexico, President Obama stated, "Much of the root cause of violence that's been happening here in Mexico... is the demand for illegal drugs in the United States."3 However, Mr. Obama failed to specify whether the cause of the violence is drugs per se or the fact that drugs are illegal.
Economics is a science of means and ends. Thus, the question for economics is whether the means—drug prohibition—is effective in promoting the ends of greater health, safety, and productivity, as well as lower violence and criminal justice costs.
The Economics of a Supply-Side War
Both the possession and distribution of illegal narcotics are criminally punishable. However, the penalties for distribution, whether street-level dealing or international smuggling, have always been much harsher than the punishments for possession. Possession—at least for marijuana—is becoming decriminalized in some states. Meanwhile, enforcement devoted to interdiction of imports and the breaking up of dealer networks continues. In short, while there are demand-side penalties, the U.S. government's war on drugs is primarily a supply-side war.
At its core, a supply-side drug war acts essentially like a tax placed on drug suppliers.4 It increases their cost of bringing drugs to market and, thus, decreases their willingness to supply drugs. The result, as in virtually any other market, will be higher prices and a smaller quantity supplied. The key question for whether a supply-side drug war can be won is whether the main effect is an increase in price or a decrease in quantity. If the drug war is to be effective, its main effect must be to decrease quantity rather than to increase price.
The amount of illegal drugs that people use is not very sensitive to price. Many addicts likely continue to consume close to the same quantity even in the face of large price increases. The demand for illegal drugs is what economists call "price inelastic."5 Figure 1 illustrates the effect of a supply-side drug war on an inelastic demand.
The war on drugs shifts the supply of drugs from Supply (No Drug War) to Supply (Drug War) because of the increased difficulty of getting the drugs into the United States and then distributed to users. As a result, the benefit, in the eyes of the drug prohibitionists, is the decrease in consumption from Q1 to Q2.
The main effect of a supply-side drug war is a large increase in the price of drugs. Revenues of drug dealers equal the price of the drugs times the quantity sold. Because the drug war increases price more than it decreases quantity, the remaining drug dealers have more revenue as a result of the drug war. In the above figure, the drug war costs suppliers the revenue in the blue box, but suppliers gain the revenue in the larger red box. They can use this increased revenue to buy better technology to smuggle drugs into the United States, to buy more and better weapons to fight law enforcement, or to corrupt more judges and police officers.
Because the demand for drugs is not price-sensitive, each "victory" in the war on drugs enhances drug dealers' revenue, making future decreases in supply all the harder to achieve. It is no accident that the number of annual drug-related deaths in Mexico almost quintupled from 2,300 in 2007 to 11,000 in 2010. This increase was a result of the Mexican government's stepped-up enforcement efforts.6 The drug suppliers used their enhanced revenue to fight back more violently.
If this were the end of the story, some people might say, "Even if a supply-side war is impossible to completely win, at least it is a step in the right direction. After all, it does decrease the quantity of drugs used." Unfortunately, this decrease in drug use comes with great costs that undermine the very goals of the war.
Read (much) more: http://www.econlib.org/library/Columns/y2013/Powelldrugs.html
The late Nobel Laureate James Buchanan was known to say, "Economics puts limits on people's utopias." Unfortunately, the advocates of the U.S. government's war on drugs have failed to appreciate the economics underlying the drug war that makes their utopian vision impossible to achieve through drug prohibition.
Although the Obama administration has softened the rhetoric of prior administrations by talking about treatment rather than an "enforcement-centric 'war on drugs' approach,"1 enforcement budgets remain large and penalties for distribution severe. As for legalization, the administration claims that "drug legalization also runs counter to a public health and safety approach to drug policy. The more Americans use drugs, the higher the health, safety, productivity, and criminal justice costs we all have to bear."2
Regarding violence, in a recent speech in Mexico, President Obama stated, "Much of the root cause of violence that's been happening here in Mexico... is the demand for illegal drugs in the United States."3 However, Mr. Obama failed to specify whether the cause of the violence is drugs per se or the fact that drugs are illegal.
Economics is a science of means and ends. Thus, the question for economics is whether the means—drug prohibition—is effective in promoting the ends of greater health, safety, and productivity, as well as lower violence and criminal justice costs.
The Economics of a Supply-Side War
Both the possession and distribution of illegal narcotics are criminally punishable. However, the penalties for distribution, whether street-level dealing or international smuggling, have always been much harsher than the punishments for possession. Possession—at least for marijuana—is becoming decriminalized in some states. Meanwhile, enforcement devoted to interdiction of imports and the breaking up of dealer networks continues. In short, while there are demand-side penalties, the U.S. government's war on drugs is primarily a supply-side war.
At its core, a supply-side drug war acts essentially like a tax placed on drug suppliers.4 It increases their cost of bringing drugs to market and, thus, decreases their willingness to supply drugs. The result, as in virtually any other market, will be higher prices and a smaller quantity supplied. The key question for whether a supply-side drug war can be won is whether the main effect is an increase in price or a decrease in quantity. If the drug war is to be effective, its main effect must be to decrease quantity rather than to increase price.
The amount of illegal drugs that people use is not very sensitive to price. Many addicts likely continue to consume close to the same quantity even in the face of large price increases. The demand for illegal drugs is what economists call "price inelastic."5 Figure 1 illustrates the effect of a supply-side drug war on an inelastic demand.
The war on drugs shifts the supply of drugs from Supply (No Drug War) to Supply (Drug War) because of the increased difficulty of getting the drugs into the United States and then distributed to users. As a result, the benefit, in the eyes of the drug prohibitionists, is the decrease in consumption from Q1 to Q2.
The main effect of a supply-side drug war is a large increase in the price of drugs. Revenues of drug dealers equal the price of the drugs times the quantity sold. Because the drug war increases price more than it decreases quantity, the remaining drug dealers have more revenue as a result of the drug war. In the above figure, the drug war costs suppliers the revenue in the blue box, but suppliers gain the revenue in the larger red box. They can use this increased revenue to buy better technology to smuggle drugs into the United States, to buy more and better weapons to fight law enforcement, or to corrupt more judges and police officers.
Because the demand for drugs is not price-sensitive, each "victory" in the war on drugs enhances drug dealers' revenue, making future decreases in supply all the harder to achieve. It is no accident that the number of annual drug-related deaths in Mexico almost quintupled from 2,300 in 2007 to 11,000 in 2010. This increase was a result of the Mexican government's stepped-up enforcement efforts.6 The drug suppliers used their enhanced revenue to fight back more violently.
If this were the end of the story, some people might say, "Even if a supply-side war is impossible to completely win, at least it is a step in the right direction. After all, it does decrease the quantity of drugs used." Unfortunately, this decrease in drug use comes with great costs that undermine the very goals of the war.
Read (much) more: http://www.econlib.org/library/Columns/y2013/Powelldrugs.html
