by Deepthi Sai
Everyone knows that no government likes drugs, such as heroin, cocaine and ecstasy, flooding their markets. Drugs are very easy to get addicted to and push people to commit crimes so they can procure money to satisfy their needs. In order to combat this issue, the government spends a lot of money curtailing supply. Drugs are clearly illegal, but there still manages to be huge market for drugs in the underground economy. So how effective is this ban on drugs anyway?
Everyone knows that no government likes drugs, such as heroin, cocaine and ecstasy, flooding their markets. Drugs are very easy to get addicted to and push people to commit crimes so they can procure money to satisfy their needs. In order to combat this issue, the government spends a lot of money curtailing supply. Drugs are clearly illegal, but there still manages to be huge market for drugs in the underground economy. So how effective is this ban on drugs anyway?
Before I proceed, let me introduce the characters we will consider. We have drug users (buyers), drug dealers (sellers) and the government. Now the government decides to increase the number of agents on duty to keep a check on smugglers. The increased force is successful in the sense that many smugglers get arrested and the inflow of drugs is reduced. When this happens, the few dealers who do manage to sneak the product in start hiking up prices to account for the additional risk involved in making these drugs available to users.
Now the drug market is mostly full of people who are at very high stages of addiction. So a drastic change in price does not really motivate them to leave the market, at least not immediately. Even if they were motivated to leave, they would not be able to since addiction is a physiological phenomenon. These people would be willing to pay any price demanded by the dealer which would in turn increase drug-related crimes. Thus, a policy which was initially introduced specifically to lower the drug-related crime rate ends up backfiring: The number of drug-related crimes increases and the drug dealers who stick it out in the market end up making huge profits and are further motivated to continue selling drugs.
Over a period of time, things start changing. The apprehensive dealers who dropped out because of increased force might begin to get lured by the increasing profits in the market. In the market for illegal drugs, drug use might have fallen because of the interdiction but the increased prices could increase profits for the dealer. Thus, slowly the number of suppliers in the market increase. As more of the product starts becoming available, the price starts falling. People who may have interimly quit because of increased prices might get back to using and even worse, the lower prices could lure new users who are willing to experiment.
Now, that’s a whole new dimension to the story, right? A lot of economists believe these are the dynamics at work, and that bans on drugs don’t really address the problem. Economists suggest curtailing demand through better rehabilitation facilities and spreading awareness about the issue instead.
There is, however, another set of economists who believe that addicts will have an incentive to get over their addiction when prices begin to escalate. They believe demand is inelastic (does not change much with a change in the price) in the short run and becomes elastic (changes with a change in the price) in the long run. Thus, the increase in drug related crimes will only be a short run phenomenon.
What brings an exception to convention in this case is the nature of demand for drug use. Most goods follow the law of demand (when price increases, the quantity demanded falls) however the degree up to which it follows the law can differ between goods. When there is inflation in the economy, you may convince yourself not to buy a t-shirt you like but will you think before you buy vegetables or fuel? The demand for goods like the t-shirt is elastic whereas that for fuel is inelastic. Drugs, just like fuel becomes a necessity for an addict and hence demand for drugs is considered inelastic. Thus, elasticity of demand influences a consumer’s behaviour in response to fluctuations in price and understanding this is important for any government to be able to formulate appropriate policies.
Now the drug market is mostly full of people who are at very high stages of addiction. So a drastic change in price does not really motivate them to leave the market, at least not immediately. Even if they were motivated to leave, they would not be able to since addiction is a physiological phenomenon. These people would be willing to pay any price demanded by the dealer which would in turn increase drug-related crimes. Thus, a policy which was initially introduced specifically to lower the drug-related crime rate ends up backfiring: The number of drug-related crimes increases and the drug dealers who stick it out in the market end up making huge profits and are further motivated to continue selling drugs.
Over a period of time, things start changing. The apprehensive dealers who dropped out because of increased force might begin to get lured by the increasing profits in the market. In the market for illegal drugs, drug use might have fallen because of the interdiction but the increased prices could increase profits for the dealer. Thus, slowly the number of suppliers in the market increase. As more of the product starts becoming available, the price starts falling. People who may have interimly quit because of increased prices might get back to using and even worse, the lower prices could lure new users who are willing to experiment.
Now, that’s a whole new dimension to the story, right? A lot of economists believe these are the dynamics at work, and that bans on drugs don’t really address the problem. Economists suggest curtailing demand through better rehabilitation facilities and spreading awareness about the issue instead.
There is, however, another set of economists who believe that addicts will have an incentive to get over their addiction when prices begin to escalate. They believe demand is inelastic (does not change much with a change in the price) in the short run and becomes elastic (changes with a change in the price) in the long run. Thus, the increase in drug related crimes will only be a short run phenomenon.
What brings an exception to convention in this case is the nature of demand for drug use. Most goods follow the law of demand (when price increases, the quantity demanded falls) however the degree up to which it follows the law can differ between goods. When there is inflation in the economy, you may convince yourself not to buy a t-shirt you like but will you think before you buy vegetables or fuel? The demand for goods like the t-shirt is elastic whereas that for fuel is inelastic. Drugs, just like fuel becomes a necessity for an addict and hence demand for drugs is considered inelastic. Thus, elasticity of demand influences a consumer’s behaviour in response to fluctuations in price and understanding this is important for any government to be able to formulate appropriate policies.
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