I think a lot about drugs. Really. Illegal drugs are in the freest market in the world: the black market. It's very interesting to see how the invisible hand works in a market with zero regulation (prohibition is not regulation. When the government makes something illegal, it gives up the ability to regulate it).
I'm going to get on my soap box for a minute and discuss what I believe happens after large scale drug busts. Please note that I am by no means an expert, I can't exactly remember any article specifically stating the ideas I am about to discuss. However, I have read many articles about this, and these ideas are based the information I have pulled from them as well as my own tenuous grasp of the basics of economics.
First, let's pretend that there has just been a large-scale drug bust of, say, 40,000 pounds of cocaine. This means that, all of a sudden, either the people operating a drug ring in a certain area, say, Tampa, Florida, have been arrested or, more likely, they are simply out of their product. What happens now is a matter of supply and demand.
Because of the dangers inherent in drug trafficking, as well as complete lack of regulation in the industry, illegal drugs have remarkably inflated prices by the time they reach the consumer. Cocaine, for example, can have a markup of up to 20,000% (I got this from drugtext.org, but it's down currently, sorry.). According to an (admittedly very biased) source heroin is worth more than uranium by weight. When the supply of any given product drops, such as after a drug bust, while demand remains the same, prices increase. In any area where large busts happen, and the supply to consumer is cut, the prices soar even higher than before.
So, now there's less supply while demand is as strong as ever. What happens next? It seems likely that other sources of drugs exist. Someone out there must have a supply. Entrepreneurs who have their own sources of drugs are very likely to try to enter into this market where the prices are high. Sure, there are costs (transportation for "imports," dealers, etc.) but overall, the inflated prices will most likely cover the extra costs. At some point the number of new dealers in town (along with their fresh product) will increase the supply, bringing the market back to a reasonable market equilibrium (reasonable, of course, being a ridiculously artificially inflated price) and everyone, consumers and sellers, will be happy. Except for the people who were shot over taking someone's territory, but that's another issue.
This is just something I find very interesting and it's something that I love to talk about more than anything else. Actually. Feel free to argue with me, in person or in the comments section.
Subscribe to:
Post Comments (Atom)
If this is interesting to you there are two movies that you MUST see:
ReplyDeleteCocaine Cowboys
The Union: The Business Behind Getting High
Both of them extensively cover the economic, social, and historical factors of the British Columbian marijuana trade and the Miami cocaine trade, respectively.
an interesting and real example of an unregulated market, and what can happen in that type of economy. (Opinion?)
ReplyDeleteDrug legalization is one of the few topics on which my views are diametrically opposed to those of the average young liberal/Leftist/libertarian. Unlike you claim, drug prohibition is far from a lack of regulation. Though there are not direct involvements with the supply side in terms of ensuring the safety of the product(as much as it can be assured given the nature of the good), or the government taking tax money from the sales, police action is just as much a form of regulation. The government also "regulates" through anti-drug campaigns (unfortunately mediocre at best, counterproductive at worst) and the rehabilitation of addicts.
ReplyDeleteI do agree with your example that high drug prices encourage the unscrupulous to take up independent production, potentially increasing the supply. You don't state it directly, but you seem to argue that this implies we should reduce prohibition of illegal drugs, so as to remove the incentive for new producers. Am I correct in this assumption?
(A, E)
Interesting post. I'm kind of indifferent to the matter, but I feel like I've constantly heard the opposing side. It was refreshing to read some new thoughts/ideas/opinions.
ReplyDeleteE
Awesome topic, Ethan!
ReplyDeleteAfter I saw the L.E.A.P. (Law Enforcement Against Prohibition) speaker that S.S.D.P. brought in last year, I strongly believe that the deregulated market of the drug industry in counterproductive to the government's war on drugs.
If drugs were legal, they could be regulated the same way prescription drugs are now. We've seen through the legalization of medical marijuana how both profit and safe use practices are encouraged through corporate and government regulation. However, in some states (like Michigan), the idea of medical marijuana is so taboo that people with prescriptions have to get the product they need from illegitimate drug dealers, losing profit for the legitimate drug manufacturers and putting the consumers at risk of purchasing a product that might be dangerous.
I'm not saying that drugs themselves aren't dangerous. However, if they could be regulated it would not only keep people safer but also make huge profits for the government and other industries involved in their sale.
Sean, yes I do believe in the legalization of drugs in the US for a number of reasons. But regardless of that, I still find the economics of illegal business really interesting so I thought I'd write about that.
ReplyDeleteI would disagree with your belief that police actions are an effective form of regulation. Yes, there are many people who will not use illegal drugs because they are illegal or because they fear repercussions, but there are many millions of people in the US who will. This is a fact. There is a multi-billion dollar illicit industry that exists regardless of, in fact because of the illegal status of these drugs for which there is such a high demand. This industry itself IS completely unregulated. There are no taxes, no zoning restrictions, no age restrictions, no product health standards (which leads to an undeterminable number of accidental overdoses), no pricing standards, no regulations for hiring or ethical business practices, and when people are fired, they are killed.
Police actions may temporarily injure an operation, but they are sporadic and rarely eliminate the leaders of an operation. And even if they did, another operation would take its place. Drug busts don't stop people from obtaining drugs. That's like saying that if a Best Buy burns down, no one will be able to buy a new TV.
I never really thought of the drug world from an economic standpoint. This is very interesting and is a good example of what we talked about today in class (supply and demand). People will probably look for substitutes when prices of drugs are high or the supply is at extremely low levels. I would not say I'm all for legalizing drugs in the U.S., I think it would open up the market even more. More people would probably demand the once illegal drugs more because the fear of being caught would not exist any longer.
ReplyDelete(A)
This comment has been removed by the author.
ReplyDeleteDo you realize that, first of all, cannabis is one of the most useful, if not THE most useful, plant of all time? Here are some things that it is capable of:
ReplyDeletehemp paper (the original Declaration of Independence was printed on hemp paper, and after over 200 years it still hasn't yellowed)
hemp textiles
medicine (here are just a few of the diseases that marijuana has been proven to effectively treat) http://en.wikipedia.org/wiki/Medical_cannabis#Recent_studies
Cancer
HIV/AIDS
Alzheimer's
Heroin withdrawal
If you don't believe that it has medicinal uses, consider this: there is a LEGAL pill form of THC (called Marinol) available in America.
http://www.justice.gov/dea/ongoing/marinol.html
There have been thousands upon thousands of deaths caused by tobacco, alcohol, illegal drugs, and prescription drugs; guess how many documented cases of death by overdose there are for marijuana? ZERO. How many carcinogens are in marijuana? ZERO. How many in tobacco? Dozens. Do people ever hear of domestic violence cases caused by marijuana use? No, that's alcohol, remember?
The facts about the drug war are that (1) the government is losing badly and (2) over 3/5 of the money spent on the drug war goes towards marijuana (which has never caused a death), leaving 2/5 for heroin, cocaine, crack, pain killers, methamphetamines, ecstacy, and ALL of the other drugs that actually kill people COMBINED. So stupid.
First, to Rich's comment, Medical Marijiuana is not a cure for cancer, AIDS, or other diseases. It is a pain killer, like Vicodin, regardless of what wikipedia might say.
ReplyDeleteSecondly, back to economics. If a police drug bust decreases the supply of cocaine, the supply curve will shift up and to the left, as we learned in class today. Ethan is right that this will raise the equilibrium price because the demand curve does not change. However the equilibrium quantity will decrease, (see page 80 in Mankiw). Meaning that less people will buy the drug at those high prices, or buy less of it. That is, I think, one of the short term goals of a police drug bust, to lower the amount of drugs being used. In the long term these bust are only effective if they arrest high ranking drug deelers, or if they continue to bust large amounts.
A + T.
Caleb, I meant to put this in the post, but I guess I forgot. In response to your comment, I'd say that it is likely that, depending on the drug in question, people are likely to continue buying the drug even if the price rises. If we are talking about addicts, these people become dependent on their drug, and are most likely willing to pay more for it, especially if they know it's only temporarily.
ReplyDeleteWell, ignoring Rich's comments being moderately incorrect and not particularly related to economics, I'm curious what Ethan and others see as the goal of drug legalization. Your argument doesn't state any end goal of legalization, beyond potential safety bonuses to users and less violence. I argue that these do not sufficiently outweigh the negative effects.
ReplyDeleteAs Caleb stated, higher prices are going to decrease demand, though not completely given the nature of the demand (addiction to hard drugs). Ethan brings up the point that one does not stop the sale of TVs by burning down a Best Buy, and he is quite right. To really stem the flow one must hit the corporate infrastructure, something which law enforcement is unfortunately moderately incompetent at doing, likely because of corruption and the decades of experience organized crime has at avoiding attention.
The legalization of hard drugs would be harmful to the health of the economy and the nation as a whole, resulting in yet further impoverishment of the poor, decline of the middle class, and idleness of the rich. Money spent on heroin is money not spent on food or a consumer good. A weekend spent drugged into a stupor is huge opportunity cost that goes well beyond the price of the drug.
A degree of addiction to a good, be it to a drug or to chapstick, is dangerous when one actor has the power to propagate the addiction, spending the profits made from others irrational addictions to create new customers. Organized crime has a massive network in place to create, transport, and sell their products, what makes you think that the entire black market would switch over to an open, taxable one when there is no incentive to do so?
I never thought about drug busts in the sense of supply and demand. I understand your point, that drug busts are causing more and more people to take advantage of the high demand and low supply market. Theory says that as the supply decreases the demand increases. So what programs and polices does government push for to prevent the illegal drug market from flourishing?
ReplyDeleteIn response to Sean's last comment:
ReplyDeleteThere are several reasons why I believe drugs should be legal. Read this: http://www.lysanderspooner.org/VicesAreNotCrimes.htm Basically, I believe that victimless crimes, ones in which the only person injured by an action is the person who willingly engages in the action, should be legal. But there are many more reasons, which I will get to.
In response to my comment about how people will still get TVs if a Best Buy burns down, you said "To really stem the flow one must hit the corporate infrastructure, something which law enforcement is unfortunately moderately incompetent at doing." I would say, however, that if law enforcement were to take down the infrastructure of a drug operation, another one would simply takes its place. I read an article in which a coca farmer said "We'll stop selling when you stop buying." There will always be a demand for drugs, this is my opinion, and there will always be people willing to satisfy that demand for insanely high profits.
You also say "Money spent on heroin is money not spent on food or a consumer good." If heroin were taxed, regulated, and legal, it would BE a consumer good. If drugs are made legal it could potentially generate an incredible amount of revenue for the state and federal governments. Also, it would open up the potential for thousands of legal jobs that would help the economy grow. Several months ago an article about the growing medical marijuana business was the cover story of Fortune magazine.
Next you say, "A weekend spent drugged into a stupor is huge opportunity cost that goes well beyond the price of the drug." This is very true. I agree completely. But the exact same thing can be said of getting drunk on the weekend (someone which college students excel at), or spending your days watching cartoons and eating only cocoa puffs. I think drugs should be legal just as I think it should be legal to bash your head against a wall. My point is that there are plenty of bad, dangerous, stupid things that people are allowed to do without being punished by a third party. They are only willfully punishing themselves. I know, I know, someone is thinking "but they're not just punishing themselves. They're hurting other people,too" Okay, so when and if they do hurt someone else, lock 'em up. But only if. People get drunk and high and eat cocoa puffs all the time without hurting anyone. However, if someone gets drunk and punches someone, or really does go cuckoo for cocoa puffs and rams his truck into his neighbor's house in a mad, chocolatey frenzy, they can definitely be punished.
Finally you say "what makes you think that the entire black market would switch over to an open, taxable one when there is no incentive to do so?" They will have to, or find another calling. If something becomes legal, the black market for it disappears. Why would anyone purchase their drugs from the guy on the corner with baggies when they can get the same product from the store where it is labeled, they know it's safe, and it's probably cheaper? People didn't continue bootlegging and smuggling liquor after alcohol prohibition.
This comment has been removed by the author.
ReplyDeleteSo, I kind of forgot to write more about why I think drugs should be legal. I just responded to specific things you said.
ReplyDeleteFirst of all, there's a lot of violence that we call "drug violence." But I would call it "drug prohibition violence." People sell things all the time without killing each other. There is nothing intrinsically violent about drugs, but the nature of its prohibition makes it so that rival "businesses" have to kill each other to keep their property. After all, they can't file a lawsuit. The only regulation in the industry is self-regulation, and when people are dealing with such a huge amount of money, they can hardly be expected to regulate themselves in an ethical manner.
Drug prohibition also sets the groundwork for numerous other injustices. Police raids, often deadly, are constantly carried out in pursuit of drugs. Check this out for why they are a huge issue. http://www.cato.org/raidmap/
SO much money can be made by police agencies through the use of asset forfeitures (another thing that I could talk about for hours, seriously.) which are performed all the time under the name of drug enforcement. The issue with these is that %80 of the time, no one is even charged with a crime. The pursuit of drugs is often a guise for the pursuit of department funding.
Prohibition also lends itself to a culture of fear and persecution. Addicts are afraid to get help, in terms of rehabilitation, for fear of being jailed. People can't get jobs if they test positive, even if they never would have set foot in the workplace while high and would be perfectly competent workers. People try to eat their stashes when about to be found out by the police and then accidentally die (this happens more often than you'd expect). Just the other day, a boy called 911 on his drug dealing mom. Then he was sent to protective custody. Was it worth it?
Lastly, prohibition punishes actions that I don't believe should be punishable. I won't speak on marijuana, but for the most part, hard drugs are bad. It is a stupid idea to do drugs. But I also think people have a right to do stupid things. We do them all the time without being punished.
"Prohibition will work great injury to the cause of temperance. It is a species of intemperance within itself, for it goes beyond the bounds of reason in that it attempts to control a man's appetite by legislation, and makes a crime out of things that are not crimes. A Prohibition law strikes a blow at the very principles upon which our government was founded."
-Abraham Lincoln
"My point is that there are plenty of bad, dangerous, stupid things that people are allowed to do without being punished by a third party."
ReplyDeleteJust as with legal goods, I am loathe to accept the gross profit of some few out of the misfortune of the many, particularly when the many are exploited (psychologically as through abusive advertisements, or physiologically as through addiction).
The answer to drug abuse is not to make creation, sale, and marketing easier, but to proactively rehabilitate the victims and destroy the infrastructure and profit in the industry. Though new heads would surely rise from the hydra, I doubt that these criminal organization hold the same longevity as the mythical beast. Prolonged enforcement against the roots of the problem can result in suppression, if not complete elimination. To put it in loose (grasping at straws here) economics terms: the rising (figurative) price of the good - profits, lowers the demand for those willing to risk themselves in these endeavors, resulting in reduced supply.
And yes, if the government were able to start enforcing more efficiently, they would have done so long ago. But I do not see your proposal as having the benefits you believe it does (taxation, safety, and a false "freedom") to the costs (yet another market providing a good against the wellbeing of the people). Unsurprisingly, yet further capitalism (even in marginally regulated form) is not the answer. I'm using far too many parentheses (but it's rather late and I should be asleep)
Caleb: I never said it was a cure, I said it was a TREATMENT. And it isn't simply a pain killer; it has been tested in clinical trials and proven to slow the formation of Alzheimer plaques, reduce tumor growth in several forms of cancer, and virtually eliminate the symptoms of heroin withdrawal (which, btw, can kill a person).
ReplyDeleteSean: None of what I said is (even moderately) incorrect, do the proper research. And how doesn't it relate to economics? I didn't connect the dots for you because I figured that it was obvious, but I guess I can explain it to you.
If you legalize the drug trade the presence of marijuana will increase across the board; people will be able to grow cannabis on their own, companies will be able to freely sell seeds, and industrial hemp will be usable as a textiles, paper, and biodiesel. This will help the economy because the use of industrial hemp alone would significantly increase America's usable resources. In addition, legalization would lower the outrageous black market prices on drugs, so drug users would have more money to spend on normal, everyday goods than they do now with the high prices.
http://www.youtube.com/watch?v=3HLzmH9VB6A
ReplyDeleteIf you don't believe what I say, watch this movie (the link is the trailer for it).