1. More Slides from Ed Dolan’s Econ Blog http://dolanecon. blogspot
More Slides from Ed Dolan’s Econ Blog Econ 101, Hayek, and Why We are Losing the War against Drugs Posted March 30, 2011
Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.

2. The Drug Wars Spread
After shaking the economic and political structures of Mexico and Columbia, the drug wars are moving to Central America
Where to look for clues to why the United States is losing its endless war on drugs
Econ 101 and demand elasticity
The writings of Friedrich Hayek
Photo sources:
Posted March 30, 2011 on Ed Dolan’s Econ Blog

3. Elasticity of Demand
Price elasticity of demand means the percentage change in quantity of a good demanded that is associated with a one percent change in price
If the percentage change in quantity is greater than the percentage change in price, demand is elastic
If the percentage change in quantity is less than the percentage change in price, demand is inelastic
Posted March 30, 2011 on Ed Dolan’s Econ Blog

4. Revenue and Price when Demand is Elastic
When demand is elastic, a decrease in price will produce an increase in revenue
Example:
100 units are sold at a price of $100 for revenue of $10,000
If price is cut to $90, 120 units are sold for revenue of $10,800
Posted March 30, 2011 on Ed Dolan’s Econ Blog

5. Revenue and Price when Demand is Inelastic
When demand is inelastic, an increase in price will produce an increase in revenue
Example:
100 units are sold at a price of $100 for revenue of $10,000
If price is increased to $120, 90 units are sold for revenue of $10,800
Posted March 30, 2011 on Ed Dolan’s Econ Blog

6. Elasticity of Demand for Cocaine
Data on demand for illegal drugs is limited because of the nature of the market
However, some studies have been done. They suggest that demand for cocaine is inelastic
One survey of the literature* found estimates of demand elasticity ranging from -.51 to -.73, indicating that a 1% increase in price reduces quantity sold by less than 1%
Accordingly, revenue from sale of cocaine would tend to increase when the price increases
*Link for elasticity estimates:
Posted March 30, 2011 on Ed Dolan’s Econ Blog

7. Implication of Inelastic Demand for Policy
The main strategy in the war on drugs is interdiction of supply, which tends to shift the supply curve upward and to the left
With inelastic demand, we expect interdiction to lead to an increase in revenue for drug cartels
More revenue may not mean more profit, because costs increase
However, more revenue means more money to spend on hiring thugs and corrupting politicians
In that sense, interdiction is a self-defeating strategy that increases, rather than decreases, corruption and drug violence
Posted March 30, 2011 on Ed Dolan’s Econ Blog

8. Cocaine and Heroin Prices Have Fallen Over Time
Despite efforts to reduce supply, prices of cocaine and heroin have fallen over time
Possible explanation: Drug cartels have invested in capital and technology like drug-smuggling submarines that have reduced costs over time despite interdiction efforts
Follow this link to view the original graph from which this one was derived
Posted March 30, 2011 on Ed Dolan’s Econ Blog

9. Organizational Effects of Interdiction Policy
Drug cartels in some respects act like normal businesses
Prices affect demand for the product according to elasticity
Part of revenue is reinvested in technologies to improve delivery and reduce costs
In other ways they are different
They recruit people who are not inhibited by laws or morals
They use far more violence in pursuit of profits
The results resemble the structure of totalitarian organizations as described by Friedrich Hayek
Yet while there is little that is likely to induce men who are good by our standards to aspire to leading positions in a [drug cartel], and much to deter them, there will be special opportunities for the ruthless and unscrupulous. There will be jobs to be done about the badness of which taken by themselves nobody has any doubt [as a result] the readiness to do bad things becomes a path to promotion and power. 
Friedrich Hayek, The Road to Serfdom
Words “drug cartel” have been substituted for “totalitarian organization” used in original
Hayek Photo courtesy of Mises Institute
Posted March 30, 2011 on Ed Dolan’s Econ Blog

10. The Bottom Line: Why We are Losing the War on Drugs
As long as demand is inelastic, efforts to restrict supply have the unintended consequence of increasing revenue for drug cartels
Increased revenues are invested in hiring thugs, corrupting politicians, and new delivery technology
Illegal organizations attract violent, immoral people who use violent, immoral business practices
In these respects, the war against drugs creates the conditions for its own failure
Posted March 30, 2011 on Ed Dolan’s Econ Blog