1. Chapter 15 the economics of illegal drugs
Introduction to Economics: Social Issues and Economic Thinking
Wendy A. Stock
PowerPoint Prepared by Z. Pan
Chapter 15 the economics of illegal drugs
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2. After studying this chapter, you should be able to:
Describe the incidence of drug use
Model the externalities associated with drug use
Describe the incomplete information problem associated with drug use
Appraise the policy responses to drug use
Analyze supply and demand issues in regulation policy
Analyze the impacts of drug legalization
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3. Copyright © 2013 John Wiley & Sons, Inc.
“War on Drugs”
War on Drugs began in the 1970s
Against heroin, cocaine, crack, marijuana, methamphetamine, etc.
Federal funding for drug control programs $15.5 billion annually
2 million Americans are arrested for drug-related offenses each year
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4. The Incidence of Drug Use in U.S.
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5. Copyright © 2013 John Wiley & Sons, Inc.
The Market for Drugs
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6. Market Failure: Externalities
Externalities occur when some of the costs or benefits of a trade are imposed on people outside the trade.
Negative externalities are costs that are imposed on third parties.
Positive externalities are benefits that are imposed on third parties.
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7. Private vs. Social Marginal Costs
Private marginal costs are marginal costs that accrue only to the producers of a good or service.
Social marginal costs are marginal costs that accrue to society as a whole.
MCsocial = MCprivate + Negative Externality
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8. Negative Externality in Drug Market
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9. Market Failure: Imperfect Information
Imperfect information occurs when demanders or suppliers do not know the true costs and benefits associated with a good or service.
e.g. cigarette industry
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10. Fighting Drugs: Demand-side Policies
Laws that illegalize drug use
Prevention and treatment programs
1970s - methadone clinics
1980s –
“Just Say No” campaign
D.A.R.E. program
Montana Meth Project (MMP)
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11. Impact of Demand-side Policies
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12. Fighting Drugs: Supply-side Policies
Interdiction (disrupting transport of drugs), 2.5 billion dollars per year
Destroying drug production facilities, eradicating crops
Pressuring foreign governments to help reduce exports of drugs to U.S.
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13. Impact of Supply-side Policies
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14. Importance of Elasticity of Demand
When the demand for drugs is relatively elastic, supply-side policies cause the quantity of drugs used to fall dramatically from Q to Q'.
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15. Importance of Elasticity of Demand
When the demand for drugs is relatively inelastic, supply-side policies do not generate very large reductions in drug use, but do cause large increases in drug prices.
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16. Policy Implications of Elasticity
Elastic Demand
Marijuana
Methamphetamine
Inelastic Demand
Heroin
Cocaine
Results of Supply-side policies
large reductions in quantity and small increases in price for marijuana
large increases in price but only small reductions in quantity traded for heroin, cocaine
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17. Economics of Legalization
Personal Use of Marijuana by Responsible Adults Act in 2009
16 states allow for legal use of marijuana for medical purposes
Impacts on Children?
Gateway to more dangerous drugs?
Historical experiences in legalizing illegal goods/services
Abortion (Roe v. Wade in 1973)
Alcohol (Prohibition period )
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18. Factors Affecting Demand & Supply
Higher Demand due to:
Costs of using it (fines and imprisonment) fall
Higher Supply due to:
Risk of fines and imprisonment for producers falls
Production and transportation costs fall
Better production technology
Safer drug under regulation?
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19. Potential Impacts of Legalization
What would happen to the price of marijuana?
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20. Addressing Negative Externalities
Taxing drugs like pollution
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21. Questions/Discussions
In 2011, 16 states had enacted laws legalizing medical marijuana. How would the legalization of medical marijuana affect the market for illegal marijuana?
Would legalizing drugs reduce crime? Why or why not?
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22. Copyright © 2013 John Wiley & Sons, Inc.
Key Concepts
Negative externalities
Positive externalities
Private marginal costs
Social marginal costs
Imperfect information
Copyright © 2013 John Wiley & Sons, Inc.