The Economics of Drug Abuse Why the “War on Drugs” fails to cut consumption Chris Rose University of Bristol

Preliminary Facts In 2007, drug abuse cost the United States around 193 billion dollars. Across the nation, drug abuse makes a greater contribution to mortality than firearms. A survey of fostered children revealed that around 70% came from a home where substance abuse was ‘commonplace’. National Drug Control Strategy 2011 Annual Report, Office of National Drug Control Strategy.

Policy & Consumption Policy aims to reduce consumption through raising retail prices. ◦ Achieved through imposing costs (risks) on dealers, wholesalers, importers and producers. ◦ The Drug Enforcement Agency (DEA) is tasked with this. Akin to taxation of Alcohol/Tobacco products.

Policy & Consumption P Q Demand Supply A B

Policy & Consumption

Why isn’t policy working? Assumptions: ◦ Increasing enforcement expenditure drives up production/distribution costs. ◦ Retail prices respond to increased costs. ◦ Demand responds to retail prices. Do these hold?

Are retail prices cost sensitive? What about drug purity? ◦ Dealers are able to strategically manipulate the purity of the drugs they sell by cutting them with visually identical adulterants. ◦ Price is observed at the point of transaction and is easily compared between dealers. ◦ Purity is only observed (imperfectly) on consumption and is not easily compared between dealers. ◦ So dealers prefer to reduce purity than to raise prices. ◦ This limits the upwards shift of the supply curve. Many dealers sell 0% purity drugs, ripping off their customers to increase short-run profits.

Does the supply curve shift at all? Why become a drug dealer/producer? ◦ Poor outside options in deprived neighbourhoods. ◦ Poor outside options in producer countries. ◦ Potential for huge profits. Dealers/Producers are easily replaced. ◦ Low skilled jobs with relatively high wages. So supply is very flexible.

Does demand respond? Drugs have addictive properties. So demand is relatively inelastic. Price elasticity of demand for retail cocaine is inelastic (estimated to be around -0.40)

So what actually happens? P Q Demand Supply A B Purity adjustment ◦ The supply curve only shifts slightly to the left. Inelastic Demand ◦ Consumption is not particularly responsive. Supply is flexible. ◦ Equilibrium moves from A to B and rapidly returns to A.

What can be done? More focus on demand side policies. ◦ For a deal to occur we need: buyer’s valuation ≥ market price ◦ Buyer’s valuation depends positively on his expectation of purity.  By decreasing expected purity, we are able to decrease the probability that trade occurs. ◦ So how can we decrease expected purity?  Encourage dealers to rip off consumers.  Base prison terms on purity.  Reduced sentencing for low/zero purity sellers.

Any Questions?