Does Drug Enforcement Raise Price? Peter Reuter Vienna, September 2018

Economics is useful for the study of drug policy Demand and supply side standard classification of interventions Many interventions have both supply and demand side effects Drugs are (mostly) sold in markets Social networks also play a role The price of drugs matters Illegal heroin would cause fewer problems if a dose cost $1 per rather than $25 Thus understanding what determines drug prices important

“Economics 101” version Supply-side enforcement shifts supply curve, raising equilibrium prices and reducing equilibrium quantity. Impact on price and quantity depends on Relative price-elasticity of demand-side of the market. Effectiveness of enforcement measures on target activity, group of people, or resource. Substitutability of that vulnerable activity, group, or resource in supply activities in this market. Since supply-side relatively elastic, consumers would bear most of the resulting burdens. Effective enforcement raises prices, and raises profits for some suppliers.

Supply seizures shift supply curve left Price/ Purity- Adjusted gram Demand Supply After intervention Supply Before intervention Cocaine Sold

Rising incarceration, declining prices

Varieties of supply-side enforcement Eradication of crop in source country. Restricting access to precursor chemicals, etc. Interdiction against smugglers Arresting and imprisoning high-level dealers Arresting and imprisoning low-level drug-sellers.

Enforcement Affects Consumption Through Price Risks & Costs Retail Price Consumption

Enforcement Affects Consumption Through Price Risks & Costs Retail Price Consumption Eradication Grower Risks & Costs Leaf Price Retail Price

Enforcement Affects Consumption Through Price Risks & Costs Retail Price Consumption Eradication Grower Risks & Costs Leaf Price Retail Price Interdiction Smuggler Risks & Costs Import -Export Price Retail Price

Enforcement programs and their targets Targeted Sector Price Affected Eradication, alternative development Production and refining Coca leaf or opium Refinery destruction, precursor chemical control   Export price minus leaf price Interdiction Smuggling Import minus Export Investigation High level domestic trafficking Wholesale minus import Street level enforcement Retailing Retail minus wholesale

Eradication Most studies are simulations Most empirical studies of eradication focus on the effects on production, not price Unpublished study of manual eradication and aerial spraying in Colombia on prices of coca leaf, paste and base finds no price effects Using 2005-2011 sub-regional panel data, they find price unaffected

Precursor control Assessment of laws to restrict precursors for methamphetamine production in the US, Canada, Mexico Review shows consistent price increases, mostly a short-term phenomenon. Effect fades within 4 months. New precursor control study shows large effects on US cocaine prices 2006 control raised price by 100% Effect lasted till at least 2011

Cocaine consumption fell sharply 2006-2010

Interdiction Most granular study of interdiction and sources country events on price of cocaine 1989 to 1997. Usually generated substantial, but temporary, price increases. Simulation model suggests weak effects smugglers adapts strategically among routes into the U.S. (by air, sea or land) to interdictor resource allocation choices Raw material prices small share of total costs Doubling seizure rate raises import price by 150% but retail price less than 10%

High-level enforcement Cocaine seizures effect on retail price in US (1977-1987) Large quantity seizures (>one kilogram) account for the bulk of cocaine seized, hence this is an assessment of an intervention aimed at high level trafficking. No effect on retail price. Study of effect of large seizures of heroin in Sydney Australia More hopeful context given geography No price effect

Inconsistent findings at every distribution level May be consequence of Varying specification of enforcement intensity Alternative model specifications True differences across drugs All studies are methodologically weak Easy to identify potentially fatal flaws that are difficult to investigate

Implications Illegality itself raises price and reduces availability Existing research weak, undercuts claims enforcement can raise price Occasional supply side successes merit careful analysis to understand the ”mechanism”