An economic view of Drugs

The_Minister · 15-11-2006 1:46am #1

The laws of supply and demand are clear.
If supply is restricted the price rises.
If demand is restricted, then the supply falls.

Right now in Ireland, we attack the supply, and there is evidence to show that crime rises after big drug busts, because the drug-users must pay more for their fix. (The market for drugs is price-inelastic, no matter what the price, they will pay)

What if, following economic logic, we attacked the demand? If we start locking up the users, and make it so that people are scared of using drugs, will that solve the problem.
Economically it should work. You get rid of most of the experimentors straight away.

I must confess now, that it was a lecturer that put this in my head.

Any thoughts? Is my economic logic wrong?

dRNk SAnTA · 15-11-2006 2:14am

Yes but logistically getting rid of demand is very very difficult.

Another common argument is that drugs should be legalised - putting the supply in the governments hands. The price of drugs can be dropped to a point low enough that it is no longer attractive for criminals to risk importing their own supply (remove supernormal profits i suppose). No more drug-dealing gangs/families.

Of course people will still be taking drugs, so that may not be socially acceptable.

Waltons · 15-11-2006 2:19am

From a purely economic point of view, it looks ok. If there is no demand for drugs, then suppliers will cut supply to the country (or perhaps try to sell their product more, etc).
The thing is though, if you consider certain drugs as substitutes for others, then targeting one group of users could just lead to a rise in demand for other drugs, so you'd really have to attack the demand of all drugs (or at least ones that could be considered substitutes), and that would require the arrest of an awful lot of people before people began to get scared of being caught, and even then it would probably only be casual users who'd be scared, rather than hardcore addicts.

Overall, I'd say it'd just have the effect of pushing users more underground, unless you have police kicking in doors and checking if people were using.
Highly addicted people probably won't stop unless they're actually caught, but you might scare away casual users.
Either way, as I said above, unless you lock an awful, awful lot of people up I doubt it's feasable

seedot · 15-11-2006 2:34am

A more interesting economics analysis of drugs would be on market structure and 'firm' behaviour.

In many ways the legal restrictions are a restriction on growth in size of supplying 'firms' which means the market tends to a much purer form of competition than nearly all other commodities.

There is some branding although this only exists in niches (ecstacy, acid are examples which spring to mind) but the lack of trademark control stops this being a driver to market concentration even in these areas where it still exists (20 years ago it existed in the Canabis market which is now almost purely commoditised).

Barriers to entry are low (financially - sometimes the barriers carry guns) and there is a constant removal of established players which removes natural tendencies to oligopoly.

There is some cross competition between products in the wider drug market, although as you say the presence of addictive buying patterns does reduce this (although not as much as is often thought - even an opiate user will often purchase stimulants if this is all that is available).

Vertical integration happens but at a certain point generally breaks down - likewise horizontal integration is either suppressed or collapses in bloody feuds.

An interesting aspect has been import substitution across a number of product markets - although access to raw materials in the two most high profile product areas (heroin, cocaine) obviously puts a limit on this.

Overall -if you were to follow the neoclassical argument to its extreme - the solution is to make all other goods illegal as well as it sems to be good for competition ;-).

Other fruitful areas of analysis could focus on the impact of raw materials trade and technology diffusion. But investing in prisons to reduce demand - nah, tried that - ended up looking really stupid.

The_Minister · 15-11-2006 1:27pm

Wow. I never thought of it like that. Thats real good economic thinking. You're actually right, the drugs market is the nearest thing to a perfectly competative market.
/mind blows

Tricity Bendix · 16-11-2006 2:57am

Not entirely. Without the protection of the law, gangs (which can be called 'firms') with the most gons and/or footsoldiers will have an advantage over a certain area, which could be used to prevent new entrants from entering.

Furthermore, firms in perfectly competitive markets are price takers. This does not sit well with the reality of the drugs trade. Dealersalmost certainly have some control over their prices, and may even practice price discrimination.

Finally, one gang may be in a monopoly situation for a given area. Addicts within this area have no choice but to go to the one gang to get their fix, thus giving the gang considerable market power, which is not in keeping with the principles of a perfectly competitive market.

I may explore the labour economics involved at some later date, but I'm tired.

Night all.

keynesian · 17-11-2006 6:28pm

Drugs follow the law of an Oligarky Market, it's a racket curve. For exapel, the price of hash has been E20 for a 1/4, E is E5/10 for a pill in a night club, these price did not even change numaricly with the euro (if I remeber corectly). Only movement on the supply chane affects price.

keynesian · 17-11-2006 8:39pm

To further my point that drugs sell is an oligopoly. Just just read the tread fully.

Barrers to Entry :
goverment efecting suply, Socail stigamy to selling(diff from buying), high cost (but only up the suply chane), lack of knollage, villance (but thats like oil, and like oil it tends to happen in the Getos, don't get my started on Getos).
note: barrers increase with level.

Price stagnation:
Price has not changed for year, as a numarical value, inflation & euro has make it cheeper. Cost of incleasing price is high but not because of competition, any guesses? Or phycologicaly difficute. Price collution, seller fight over market position. Price ony changes as u move up the suply chain or closer to sorce on brand/product.

Product diferancation:
Sellers market there product. Branding happens in almost all drugs(including alchol). E.g. arawana: hash, weed, morocan, skunk, dublin ****, color of weed. Seller inclease price by marketing. Differance in quality (may be a perseption) efect price.

Few sellers:
Buyer/ sellers will know more then one distributor. Due to barrers the number of sellers and distributor is small. Even with vilance, no seller is able to take out competition, plus there is a cost to vilance(and i don't mean loss of life).

the market forces look diff at diff levels and at differant time. e.g. goverment interferance in the market. At the bottom of the chain more likly to be imperfect competition but as you go up it look like oligopoly, as barriers inclease.

If you want to anilise drug market look at Alcol and oil.

Why not flood the market place and bankrupt seller. Think about that.

mountainyman · 22-11-2006 1:21pm

The_Minister wrote:

What if, following economic logic, we attacked the demand? If we start locking up the users, and make it so that people are scared of using drugs, will that solve the problem.
Economically it should work. You get rid of most of the experimentors straight away.

I must confess now, that it was a lecturer that put this in my head.

Any thoughts? Is my economic logic wrong?

This is the approach that succeeded in China after the communists took over.
[1] All Opium peddlers were hanged
[2] All Opium addicts were given 2 months to clean up following which anyone (any Han Chinese different rules applied to tribal people) in posession of Opium was hanged.

It worked.

MM

keynesian · 22-11-2006 9:06pm

You have not yet question the economic shock of what u propose.

How many addicts there are?
If a high proportion of the work force are addicts or users removing them will cause quite an odvous shock to the economy. Even if it is a low % of the work force, the shock could be great cuppeled with the following factors. You should not prosume that addict/users proform low skilled jobs.

Cost/injection of fund to policing/imprisonment/death?
All citizan will have to be tested, prosumable for all drugs from a to c, this would be a high buden on the tax payer. Along with doctors and test kits, Gards would have to be employed. This would of course increase employment, already high from taking citizan out of the work force.
When disposing of addicts/'users we could go for the cheep opointion and kill on site. Though there maybe a clean up cost. (I favour this on cost). We could imprision but the cost of building new fasilities would be high and act as a stimulation to the economy whitch has already been put under stress. Plus we are now rising demand of labour in the market.

Need for economic migants?
We have now reached a point where by we are posible (even over)stimulating the economy but hopefully this will be counter acted by drop in consumer spending, well cos u just lock them up. However to cope with the demand for labour there would be an influx of foran labour. though I would see no problum in this, other then socail/political.

What time scale were you proposing for this. Too fast and you risk over stimulating the econimy(we do not have the luktury of comunisum). Too slow and those slipery addicts/'users may run.(which by the way would still push up demand). This maybe a good proposal for a laging economy but one still needs to know how many addicts/'users.

23-11-2006 9:47pm

Just a couple of points:

The influx of drugs into this country seems to be Oligolipical as they are imported in bulk by a small number of people and then redistributed over a wide area into what seems to be a competitive market. However:
1) People are not free to leave the market as they are addicted
2) 'Firms' (Skangers in hoodies) are also not free to enter or leave the market at will as wither action will probably result in a serious medical issue
3) Irregardles of consumption, the Oligarchy will still benefit as the only firms that have any risk (I use this in the financial sense) are the dealers on the street.

In relation to solving the problem:

Option A) Legalise them (I am assuming a blanket legalisation on all drugs)
This might work, given that then Goverment could tax them and use that money to compensate people who suffer at the hands of addicts, however whether legal or illegal, addicts will still need to rob to get their fix if cannot afford a hit. This method however would, to a certain extent, eliminate the loss to society created by dealers infighting and junkies robbing.
There would remain though, a residual underworld element as some dealers would remain in business and sell at under the governement (presumed high due to tax effects on an inelastic good) price.

If there were not a blanket legalisation, the dealers will then just shift supply away from the legalised substances and towards the remaining illegal substances. As the non legal drugs are (presumably) more dangerous (hence they are remaining illegal) this could acually lead to a decrease in the overall welfare of society as now the underworld would be focusing solely on the most dangerous aspects of the drug trade.

Option

'Attack Supply'
Tried, Failed
Tried, Failed
Tried, Failed

This option has been tried in the past and in many different countries and has failed. Current example: Witness the quantity of drugs that are currently circulating in Irish Prisons at the moment. If the police are unable (or more likely unwilling) to control supply in such a small and controlled environment, they would not be able to prevent supply nationwide. 'The Joy' by the author of Ross O'Carroll Kelly is a very good (if dark) read about life as a junkie and convict.

Option C) 'Attack Demand'
Lock up all caught users?
Possibly a more practical and effective measure then B or A. Becker states how crime occurs if the gains from crime are percieved to be greater then the risks and punishment of being caught. At the moment, there is little risk in using drugs - however if dealing or using carried equal punishment, and no consideration was given to quantity. Then a large scale reduction in users should occur. This would, probably, would have a larger effect on reducing supply then Options A or B and would not require that larget an incrase in police numbers.

The question remains of what to do with the convicts. Personally I believe that they should be put to work in large scale industrial settings. Naturally the revenue generated should be used to help treat their addiction, and to sustain the workplace.

Option D) Singapore Approach
Hang on Sight.
Too drastic and will not be allow the state and society to accrue the potential benefits mentioned in Option C

That's my two cents..

Personally, I don't think the problem can be completly sovled without reverting to an option D like approach, and there are still drugs in Singapore.

However, a widespread reduction should be achieveable

OTK · 27-11-2006 11:45am

original_psycho wrote:

In relation to solving the problem:

Option A) Legalise them (I am assuming a blanket legalisation on all drugs)
This might work, given that then Goverment could tax them and use that money to compensate people who suffer at the hands of addicts, however whether legal or illegal, addicts will still need to rob to get their fix if cannot afford a hit.

No, the price paid by hospitals for heroin is around 60p-£1.20 for a typical 50-100mg hit. The reason heroin costs so much is because being illegal adds a risk premium to the manufacture and supply chain. Who needs to rob for 60p?

This method however would, to a certain extent, eliminate the loss to society created by dealers infighting and junkies robbing.

It's a bizarre assumption that criminals would stop being criminals if one of their industries were shut down. Without narcotics distribution, there's always armed robbery, prostitution, blackmail, extortion, illegal weapons distribution and so on.

If there were not a blanket legalisation, the dealers will then just shift supply away from the legalised substances and towards the remaining illegal substances. As the non legal drugs are (presumably) more dangerous (hence they are remaining illegal) this could acually lead to a decrease in the overall welfare of society as now the underworld would be focusing solely on the most dangerous aspects of the drug trade.

You are presuming that dealers can alter demand for drugs. I don't see how they can.

OTK · 27-11-2006 11:54am

keynesian wrote:

Drugs follow the law of an Oligarky Market, it's a racket curve. For exapel, the price of hash has been E20 for a 1/4, E is E5/10 for a pill in a night club, these price did not even change numaricly with the euro (if I remeber corectly). Only movement on the supply chane affects price.

my drug-addled memory is different.
Hash was E120-150/ounce (100IEP-120IEP) for a good while
E was 25IEP around 1991 then 20 then 15 then 12.50 (!!!) then 10 for a while
with the changeover, price switched form 10IEP to 10Euro
Last price I heard about was certainly around the 2-3 euro when buying 50

Coke prices have also slid for a while.

NutJob · 27-11-2006 12:16pm

seedot wrote:

A more interesting economics analysis of drugs would be on market structure and 'firm' behaviour.

See here and was a great book
http://en.wikipedia.org/wiki/Freakonomics

Theres little that can be gone to curb anything more than soft drugs. From an economic point of view there are two ways of killing low level drug dealing

A. Legalization and regulation

B. Shooting dead anyone in possession of drugs on the spot.

A. Would have a beneficial effect to society with a soft drug like removing the cannabis income from low level dealers but i cant see a damaging effect from decriminalizing any of the others.

There was a BBC documentary/analysis on this exact scenario an optimistic one at that called "if drugs were legal"

my drug-addled memory is different.
Hash was E120-150/ounce (100IEP-120IEP) for a good while
E was 25IEP around 1991 then 20 then 15 then 12.50 (!!!) then 10 for a while
with the changeover, price switched form 10IEP to 10Euro
Last price I heard about was certainly around the 2-3 euro when buying 50

Coke prices have also slid for a while.

Hash as in the nasty irish grade hash 100euro an oz
E is now running at 5-7euro a pill

Both of these tend to be cheaper in cities and can vary Dependant on supply (reasonable garda raids)

27-11-2006 1:33pm

OTK wrote:

No, the price paid by hospitals for heroin is around 60p-£1.20 for a typical 50-100mg hit. The reason heroin costs so much is because being illegal adds a risk premium to the manufacture and supply chain. Who needs to rob for 60p?

You would assume that the government would raise the price higher then that of the medical market because:

A) To dampen an initial surge

To raise tax revenue; drugs are 'inelastic' goods
C) They would not be reelected if the price was deemed 'too low' by the non drug using public

OTK wrote:

It's a bizarre assumption that criminals would stop being criminals if one of their industries were shut down. Without narcotics distribution, there's always armed robbery, prostitution, blackmail, extortion, illegal weapons distribution and so on.?

Not that bizarre - I forgot the name but a well renound economics professor did a study on this a while back. I will post the link when I find it.

Basically - you enter crime because it offers you a higher income and status then you can get working a legal job.
If you legalise drugs, and regulate the market, that income is gone, and the status will be reduced. These people might then transfer into other illegal markets, however they will then face intense competition and other factors (keeping in mind that these markets don't have regulation and jobs are terminated by bullet) such as death.

What I would expect to find is that if say 80% of the drug market was eliminated tomorrow, quite a large number of the people involved would just drop out as the risk/return tradeoff would be to low to justify moving in to new markets and those who do would face severe comeptition, resulting in the reduction of elements in these markets.

Overall result: other criminal markets may increase, but not to the same proportion as the reduction of the drug market, which would lead to an increase in societies welfare.

OTK wrote:

You are presuming that dealers can alter demand for drugs. I don't see how they can.

I did not phrase my point properly.
What I meant was that if say one drug (cannabis) was legalised, then dealers would just focus on supplying other drugs - as it would not be a problem for them to drop the supply of cannabis, and use the freed up resources to increase sales of other drugs (I am assuming that most dealers sell more then one type of drug)

Andrew 83 · 27-11-2006 3:06pm

The_Minister wrote:

What if, following economic logic, we attacked the demand? If we start locking up the users, and make it so that people are scared of using drugs, will that solve the problem.
Economically it should work. You get rid of most of the experimentors straight away.

Will doing that really cut off demand? As already pointed out by people users are addicted in many cases - it's not like they flick a switch and don't want them anymore.

Surely a more sensible way of trying to attack demand is to a) tackle the root social causes of why people turn to drugs and b) help those who are addicted to overcome their addictions through putting in place the right treatments and resources.

The method you are suggesting will more likely throw into jail those who are on the bottom rung of society and already struggling with life. They're in many cases resorting to taking drugs as something of an escape. Throwing them in jail will only make things worse! How are they going to turn things around and get helped in there? Drugs are widely available in prisons.

Meanwhile the middle class 'casual' cocaine and hash (students I'm looking your direction on that one in particular) users etc are less likely to be caught as their abuses are less visible on the street so they will have little fear of arrest. And lets not forget that these cocaine and hash users are more than playing their part in financing the broader illegal drugs market and dealers - and the violence that goes with that.

You're right about there being a need to tackle demand I just don't think you're looking at the right ways of tackling it.

OTK · 27-11-2006 3:06pm

original_psycho wrote:

You would assume that the government would raise the price higher then that of the medical market because:

A) To dampen an initial surge
To raise tax revenue; drugs are 'inelastic' goods
C) They would not be reelected if the price was deemed 'too low' by the non drug using public

Yes, this was proposed when one German province was looking at selling hash. They wanted to sell at a price above the market price to prevent people selling on in the nieghbouring province. I guess you would price drugs at around 6 euro a day like cigarettes. not much cigarette related crime despite its addictiveness

Basically - you enter crime because it offers you a higher income and status then you can get working a legal job.
If you legalise drugs, and regulate the market, that income is gone, and the status will be reduced. These people might then transfer into other illegal markets, however they will then face intense competition and other factors (keeping in mind that these markets don't have regulation and jobs are terminated by bullet) such as death.

Dealers at the consumer level earn little and are likely to have other jobs. Based on a small number of dealers I have come across I doubt they would switch to other crimes except maybe dealing cigarettes, alcohol or prescription drugs. This level of dealer is not involved in violent crime, so I don't see a huge benefit to society from eliminating their drug revenue. The smaller number of high up drug dealers are career criminals and would be most unlikely to go back to college. I don't know if there is a huge amount of competition in businesses such as armed robbery and extortion.

What I meant was that if say one drug (cannabis) was legalised, then dealers would just focus on supplying other drugs - as it would not be a problem for them to drop the supply of cannabis, and use the freed up resources to increase sales of other drugs (I am assuming that most dealers sell more then one type of drug)

You seem to assume that if dealers concentrate on selling a certain drug that they can increase sales. I'm not sure this is true. Buyers seek out dealers and there is no drug marketing - it's all word of mouth from other customers. The pusher stereotype is largely a myth. One element in the attraction of a drug is likely to be its illegality. I wonder if petrol and glue would be more popular as drugs of abuse if they weren't so readily available.

An economic analysis of the harm resulting from illegal drug use and criminalisation would include

consumer deaths (time for economists' favourite exercise; counting the value of a human life)
violent crime
lost tax revenue
lost productivity
medical costs to the state
just say no campaigns
traffic deaths

Legalisation would largely eliminate 1 and 6 and gather tax revenue. On the other hand, 4, 5 and 7 could increase greatly, if legalisation led to higher usage. I guess that career criminals who use violence would continue to do so.

keynesian · 28-11-2006 5:55pm

OTK wrote:

my drug-addled memory is different.
Hash was E120-150/ounce (100IEP-120IEP) for a good while
.

Thats what I said 1/4 =E25 * 4 = E100

E was 25IEP around 1991 then 20 then 15 then 12.50 (!!!) then 10 for a while
with the changeover, price switched form 10IEP to 10Euro
Last price I heard about was certainly around the 2-3 euro when buying 50
.

Yes you can tell when I started (knowing the market price), plus in buying 50 your moving up the chain, whatever you want to call it. But Pills are a funny one and, agruable, the most comercal with a high degree of product differancation.

keynesian · 28-11-2006 6:18pm

OTK well said and structured.
I feel there is a lack of understanding of the drug market and comsumer. I simply do not have the litory skills or full knawlage to explain it, here.
original_psycho and others fail to answer how many drug users there are and how removing them would efect the economy.

OTK · 28-11-2006 7:31pm

keynesian wrote:

But Pills are a funny one and, agruable, the most comercal with a high degree of product differancation.

Pills are branded and have reduced in price much more than hash. E is easier to transport without detection (smaller and less pungent). On the other hand, the risk premium for producing and distributing e is higher than for hash as the laws specify higher penalties. Demand for hash is higher than for E, partly because people grow out of e faster than they grow out of hash. I get the feeling that wholesale hash distribution is oligopolistic with defined supply routes and trucking from North Africa compared to the more free market e distribution where a million pills will fit comfily in a car's side panels.

mountainyman · 30-11-2006 11:41am

This is an evasion of the orginal point. Rather than legalising and increasing supply eliminate demand through draconian measures. This worked in China in the 50s where the drug problem was much worse than i has been in any western society.

MM

OTK · 06-12-2006 4:20pm

Economic proposals have to be politically and socially feasible for a given society. By MMs logic, we could save money on prisons and reduce criminality by harvesting the bodies of all prisoners for organs and televising their subsequent executions on pay-per-view.

Several Asian countries, while not as extreme as 1950s China, try to suppress demand with a combination of capital punishment and unbelievably awful prisons yet this does not have a significant deterrent effect as seen by the quantities of Western tourists who smoke opium while on holidays in Thailand and take other illegal drugs at beach parties.

07-12-2006 4:25pm

Compared to other things that are legal, I don't see any externalities large enough to ban people from smoking a joint in their own home.

failsafe · 07-12-2006 6:34pm

Good thread, but the OP seems to be missing one thing. Goods of addiction break the law of demand. Most micro economic principles operate on the underlying assumption that the consumer is a rational being and acts rationally when making purchase decisions, which is not true for the average drug addict.

That's why attacking demand, in a standard economic manner, would be easier said than done.

The drug dealer as a rational supplier (or firm) is much more applicable to an economic analysis, and I guess why governments take that approach.

P.s. For anyone who finds this thread interesting, I couldn't reccommend freakonomics highly enough!

An economic view of Drugs

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