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

2. 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

3. “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.

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

5. Rising incarceration, declining prices

6. 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.

7. Enforcement Affects Consumption Through Price
Risks
&
Costs
Retail
Price
Consumption

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

9. 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

10. 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

11. 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Unpublished study of manual eradication and aerial spraying in Colombia on prices of coca leaf, paste and base finds no price effects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 sub-regional panel data, they find price unaffected

12. 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

14. Cocaine consumption fell sharply 2006-2010

15. 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%

16. High-level enforcement
Cocaine seizures effect on retail price in US ( )
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

17. 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

18. 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”