Woke up yesterday morning....
And I'm still up. Twenty five hours and ten minutes, plus or minus two for clock discrepancies.
But I have the baddest ass paper ever, and it was so much fun to write - twelve hours from start of research to completion of first draft. Final draft not due till december? Oh well. I guess while everyone else tweaks out I can just sit pretty and watch the clouds go by, cause my paper is, for the most part, DONE, bitches.
If you're at all interested in economic models of how drugs are bought and sold,< .
“Square Peg, Round Hole”
Evaluating Prevalent Economic Literature on Illicit Markets
The economics of controlled substances are nothing if not perplexing. Traditional economic theory bases consumer decisions on the assumption of rational behavior, but how can we apply this to a market in which the entire purpose of consumption is to alter one’s behavioral state? Literature on the topic is decidedly scarce due in part to data being sparse and often highly biased, as well as the inherent inability to test hypotheses once postulated. Furthermore, what literature exists succumbs to the pitfall of applying conventional economic theory to a market that is anything but conventional, with one stellar exception from the early 1990s. The general consensus among economists bold enough to delve into the field is that the blanket prohibitions on marijuana, cocaine, and heroin are detrimental both to the economy and society as a whole. [1]
Of the six articles examined, only the two most recent are truly empirical. In The Demand for Illicit Drugs, Saffer and Chaloupka apply results from the National Household Surveys on Drug Abuse to existing models of demand for legal goods in an attempt to determine price elasticity, demand, and cross-complementarity for alcohol, cocaine, and heroin, as well as the effects of decriminalization on the demand curve for marijuana. The authors put forward no hypothesis; instead merely stating observations. The results of their analysis show complementarity between all surveyed substances, with the exception of alcohol and marijuana. Data for alcohol elasticity and demand meshes with previous surveys of the topic, which are entirely more prevalent than those for narcotics. Marijuana decriminalization was found to increase consumption by between 7.6% and 8.4%. Furthermore, marijuana users were no more likely than non-users to ‘move up’ to cocaine or heroin, thus apparently refuting the government’s oft-repeated claim of marijuana serving as a ‘gateway drug’. The authors predict an approximately (~) 10% increase in regular cocaine users, a ~20% increase in occasional/casual cocaine users, a ~50% increase in regular heroin users, and a ~30% increase in occasional heroin users. [2]
A few significant flaws stand out from the article. The sample excludes both institutional and non-institutional residents of group dormitories, i.e. prisoners and college students. Both of these groups display tendencies towards increased narcotics consumption, though their relatively small size as a proportion of the population casts doubt on their ability to affect the survey’s results. Furthermore, the article applies traditional economic theory as it pertains to the relationship of demand and supply in a free market. As we shall see later, illicit or ‘black’ markets do not behave quite as predictably as their legal counterparts, and Saffer and Chaloupka base many of their conclusions on the apparently flawed assumption that a downward shift in the supply curve for narcotics will result in a rightward shift for demand.
Desimone and Farrelly conduct a similar survey in Price and Enforcement Effects on Cocaine and Marijuana Demand using more recent NHSDA results (1990-1997 as opposed to 1988, 1990, and 1991) and simultaneously expand and contract the scope of their study as compared to The Demand for Illicit Drugs. The article explores the effects of marijuana price, cocaine price, and combined narcotic enforcement activity on the demand for marijuana and cocaine, as measured by consumption. The results are unsurprising; on the whole, marijuana demand is almost entirely unaffected by marijuana price, suggesting evidence of a perfectly inelastic market that other authors reviewed later in this paper will corroborate and expand upon. Cocaine demand, however, is undeniably linked to cocaine price. The price of cocaine also exerts some lesser influence over demand for marijuana, suggesting a possible complementary relationship, though nothing as strong as that identified by Saffer and Chaloupka four years earlier. The most significant modifiers of the prices of both drugs, however, are arrest rates. The individual arrest rates for marijuana and cocaine significantly affect demand for both drugs, rather than each affecting its own counterpart. The dominance of this trend in the study leads Desimone and Farrelly to the hasty conclusion that increased expenditure on narcotic enforcement is an effective measure to reduce demand.
Putting a new spin on an old question, Becker, Grossman, and Murphy attempt to explore the effects both price and addiction on demand for narcotics, again measured by reported consumption. A refreshing blend of theory and data, Rational Addiction and the Effect of Price on Consumption applies Becker and Murphy’s 1988 model of addiction as a function of reinforcement and tolerance. In one broad stroke, the authors separate drug users into two distinct groups, each with two subgroups. The young and the poor are presented as more responsive to the price of an addictive good (be it narcotics, cigarettes, alcohol, gambling, etc) and much more willing to discount the risk of negative future effects (represented by a smaller coefficient when converting future detriment to a monetary value), despite attempts at education and deterrence. Older and wealthier consumers, by contrast, respond less to price changes and more to new information regarding the long-term detrimental effects of the behaviors in question. While increases in price and increases in available deterrent literature both have a negative effect on consumption, the differences in response between the two overarching groups are so drastic that one cannot counterbalance the other. Since information is static (a complete reversal of opinion by the scientific community is unlikely at best and impossible at worst), the authors argue that decriminalization would have little effect on demand among older and wealthier users, while drastically increasing consumption among younger and more impoverished ‘addicts’. Empirical evidence is presented as it pertains to cigarette smoking, alcoholism, and gambling, as no definitive data set was available for narcotics. The theory is sound, however, it rests again on the flawed assumption that a decrease in penalties levied against users will increase consumption. In a free and legal market this would make perfect sense, but narcotics markets ascribe to an entirely different set of behaviors, and so despite the alarmist and dire predictions about legalization’s potential to corrupt the young and poor, the entirety of the article must be discounted as improperly thought through. The authors themselves admit in their conclusion, “Clearly, we have not provided enough evidence to evaluate whether or not the use of… …drugs should be legalized.” [3]
Though muted and subtle, both Desimone/Farrelly and Becker/Grossman/Murphy allow their bias to show through in the conclusions to their papers, implying that reduced drug use is a desirable goal for society to strive towards. On the opposite side of the spectrum both stylistically and ethically, Miron and Zwiebel come out in favor of widespread decriminalization in their aptly titled The Economic Case Against Drug Prohibition. Their argument focuses around the secondary effects of the illicit drug trade and its various related externalities, and how the detrimental effects on society would be mostly if not entirely mitigated by implementing a policy of legalization.
A number of salient, rational points are proposed by the authors, most notably the increase in violence associated with any black market business. As they are driven underground by prohibition, the marginal cost of violence experienced by sellers decreases drastically. Furthermore, as sellers and users have no legal recourse to resolve disputes, violence presents itself as a quick, easy alternative to negotiation. As drug related violence receives media coverage, non-users tend to procure more firearms, which are then available for use in domestic or other non-narcotic related confrontations, or discharge accidentally. Cartelization is shown to be well suited to a black market environment, as cooperation makes it easier to avoid the law, as well as employ violence as a tool. The formation of cartels contributes to the reduction in supply and increase in price experienced during prohibition periods, as market structure shifts away from illicit perfect competition and towards illicit oligopoly. [4] As the market shifts away from a zero-profit equilibrium, and there is more money to be had in trafficking, those already in business are more willing to use violence to protect themselves and prevent new ‘firms’ from entering the market.
Not surprisingly, a government attempting to discourage a product has little use for quality controls. Thus, in a black market environment, the dangers of consumption are greatly increased, with users going only on the word of their dealer about the quality of the product. The authors furthermore contend that despite the price increases inherent in a prohibition environment, demand for narcotics is often highly inelastic. To acquire the same quantity of a given drug requires either a larger share of the user’s income to be allocated, or the user’s income to be supplemented. When it cannot be supplemented legally and the user wishes to keep ‘his’ money, income-generating crime (theft, prostitution, gambling) increases as users desperate for their fix attempt to fund their purchases. Busy attempting to combat the drug trade, the police are less able to handle the increase in crime, which spurs the drug trade again, creating a downward spiral.
By means of some half-convoluted logic, the authors attempt to prove that if current benefit did not outweigh future detriment - creating a net gain to society - then no one would use drugs to begin with. Following that train of thought, if all drugs now represent a gain to society, decreased consumption represents a detriment to society, and since prohibition directly results in decreased consumption, prohibition must clearly represent a detriment to society. Staying with the slightly radical and out-there feel of the paper’s middle section, the authors attempt to dispel purported ‘myths’ about the dangers of drug use, arguing that drugs are less addictive than they are made out to be, and even that casual drug users average higher income and productivity than their sober counterparts.
Returning to the realm of rational argument, Miron and Zwiebel run briefly through the negative externalities inherent in the prohibition environment, and present historical evidence pertaining to pre-Prohibition and Prohibition-era America that succinctly proves their points about violence but not much else. After a quick run through of some possible solutions, including the Holland model, the cigarette model, and the medicalization or British model, the authors conclude that while overall consumption would increase slightly in a decriminalized market, the reduction in costs to third parties would outweigh any social detriment from more drug use.
While their paper is largely a Marijuana Reform Party campaign brochure couched in a minute bit of theory, Miron and Zwiebel begin the first baby steps towards recognition of illicit markets as a distinct species within the economic menagerie. Before any of their sociological arguments, they establish the immediate effects of prohibition on a given market. As supplying becomes illegal, risk to suppliers increases greatly. To offset their new non-monetary concerns, suppliers compensate by raising prices. Meanwhile, penalties on users for possession and consumption decrease market demand, however, the increase in supply generally outweighs the decrease in demand, creating an overall decrease in consumption. The net effect on consumption is generally small but always negative, unless the prohibition glamorizes the drug so significantly that the ‘cool factor’ outweighs the forces of the free market.
Back on the conservative side of the fence, Eatherly’s Drug Law Enforcement: Should We Arrest Pushers or Users? tackles a fundamental question of efficiency as it pertains to combating black market distribution networks, while regarding the black market itself with more originality than any of its predecessors (especially given its relatively early publication date of 1974). Eatherly wastes no time in challenging society’s then-current policy of targeting dealers. Dealers, he postulates, are replaceable; while one is in prison another will spring up, eager to make money, and supply the temporarily empty market share, provided another ‘firm’ doesn’t get there first. The author regards penalties for purchase, use, and possession as a tax on the drug community at large, levied in both monetary and non-monetary forms. The trick is to target whichever group is least able to efficiently convert the non-financial sanctions (jail time, loss of employment, etc.) into financial penalties (by hiring lawyers or bribing police). Dealers, being more specialized and familiar with the system, are by far more efficient, so the article advocates targeting users and reducing monetary fines in favor of more jail time. At this point the article begins to let its practicality slip, as Eatherly begins to argue against traditional criminal justice theory (why pay to imprison a user when he can pay you to stay free?). On the very next page he switches gears again and argues in favor of fines for sellers, to provide more revenue and spend less money on the prison system. He fails to take into account the negative externality of property crime as a result of the higher prices that would invariably result from such fines.
Though the vast majority of the paper focuses on his dichotomist plan to jail users and fine sellers, he does bring up an interesting point about collusion between sellers and the police. By keeping the police happy one way or another, individual sellers or cartels can gain a powerful ally in maintaining market share. Who better to remove a competitor from the market than the policeman doing his job? That another dealer tipped him off is evidently irrelevant. This phenomenon has the potential to both prevent entry into the market as well as create a quasi-price floor, as anyone daring to undercut the competition finds himself in handcuffs.
As dated and flawed as it is, Eatherly’s article takes the leap of regarding the entire law enforcement and judicial process as a crucial factor in the behavior of illicit markets. In the deceptively titled Would Harassing Drug Users Work? Li Way Lee takes this idea to an entirely new level. With the inauspiciously stated goal of proving that harassing drug users will not result in a decrease in quantity consumed, Lee proceeds to create a detailed, nuanced, and remarkably elegant model of the narcotics market, flexible enough to be applied to other illicit markets as well.
The first of three key concepts in this model is the idea of separating possession from transaction. Every formula includes transaction or possession penalties in some form or another, and it is often the independent variable Lee uses to predict outcomes based on policies (by either raising or lowering the appropriate penalty to simulate effects of the new policy). Transaction penalties (TP) include the risk of being cheated, robbed, or beaten by a dealer, as well as arrested in the process of procuring narcotics. Possession penalties (PP) include the risk of being caught with a large quantity of narcotics (for harder drugs, penalties increase geometrically as weight increases arithmetically). While keeping a supply on hand allows users to avoid transaction penalties, they face increased possession penalties, and vice versa.
The behavior of drug buyers is therefore represented mathematically, based on Lee’s second crucial principle: unitary elasticity. [5] Lee argues that any given consumer will not allocate different portions of income to drugs based on the market price, merely purchasing less with the same amount of money. Thus, as TP increases, users consume less, make fewer purchases, and increase their stockpiles. Conversely, as PP increases relative to TP, users still consume less, make more purchases, and keep a smaller stockpile on hand.
. Retail sellers are observed to be highly decentralized, often only doing business with 10 to 15 customers. Competition is high on the street level and remains so all the way up the supply chain, as both consumers and suppliers have a wealth of information at their disposal (friends, books, internet, past experience, etc) to determine if a seller’s price and quality are up to expectations. Retail sellers also often shift fiscal risk up the supply chain, borrowing drugs from their own supplier on consignment (thus preventing some personal loss in the event of a robbery or bust). The supply schedule changes based on market price and transaction frequency, which are themselves linked directly to demand.
The behavior of drug dealers is represented mathematically as a function of buyer behavior. The heart of Lee’s model rests here, in the idea that all supply shifts are demand driven in some form or another. Since the market is perfectly competitive for the most part, sellers must cater to users, thus user behavior directly affects sellers, and thus enforcement policies affecting users also affect sellers. A higher TP, for instance, will result in fewer transactions, each consisting of a higher quantity. This has the direct result of lower risk for the seller, as one less sale is one less chance for him to get arrested. The marginal cost of each transaction drops with the risk, and the price drops with the marginal cost. Supply shifts to the right, as dealers feel safer and begin selling larger quantities (to provide for the stockpiles users build up as TP rises). Conversely, a higher PP means more transactions for the seller, creating more risk that he will now charge for accordingly. Marginal cost rises, quantity sold decreases, and price increases.
With this new model in hand, Lee proceeds to check and see if historical examples will validate his equations. Applying the theory to marijuana legalization in 1972, we find consumption actually did not increase. Decreased penalties resulted in proportionately lower transaction costs. Lowered transaction costs, according to the theory, lead to increased demand, as the now-safe buyers look for skittish dealers, who decrease supply in favor of safety. Furthermore, less police investigating and finding buyers means that many more police to track down the dealers, further increasing risk, marginal cost, and decreasing supply. Whatever demand increase occurred after legalization was more than counteracted by the forces of illicit market theory at work.
Similarly, the theory comes up with a plausible explanation for why supply of cocaine and heroin actually increased during the second half of the 1980s, at the height of the War On Drugs. With increased numbers of arrests, transaction costs rose, resulting in less frequent transactions overall. Concurrently, decreased user penalties for possession reduced possession costs, increasing incentive for users to stockpile and further reducing overall transactions. With marginal cost now so low, supply was free to rise.
Combined with the law of diminishing marginal returns rearing its head over an already sevenfold increase in narcotic enforcement spending over the last decade, the model easily proves Lee’s hypothesis correct. More important, though, is that the economic community has a model with which to experiment before implementing policies blindly. Just as a right shoe does not quite fit on a left foot, so was conventional market theory somewhat unsuited for application to a market where transactions lack all the capitalism-friendly protections of a modern Western society. Rather the opposite: the society is actually brought to bear against the market.
This is not to say that the previous five articles are based in fiction, or that their hypotheses are incorrect. Eatherly’s points are for the most part nothing short of asinine. Miron and Zwiebel practically package marijuana in with the article, so unabashedly do they advocate for its legalization, while Becker, Grossman, and Murphy rest on their laurels from the late 80s and make statements as bold as a mouse in a lightning storm. The two statistical surveys are just that - statistical surveys, proving correlations between variables, but perhaps placing too much faith in their subsequent predictions. By contrast, Lee’s article (more a vessel for his model than an article in and of itself) represents a breakthrough within the field of economics, and an invaluable tool for policymakers open-minded enough to accept that their market theory-derived policies cannot function if their target refuses to behave as classical markets ought.
[1] N.B. This paper is not intended to serve as a forum for legalization advocacy, and all opinions expressed herein are those of the respective authors cited.
[2] These samples assume a 50% price reduction in narcotics post-legalization.
[3] Becker; Grossman; Murphy Rational Addiction and the Effect of Price on Consumption pp. 241
[4] The supply reduction phenomenon of illicit markets is further explained in reference to Li Way Lee’s Would Harassing Drug Users Work? For the time being, it should be assumed as a given.
[5] Lee cites Nisbet and Vakil 1972 as proof that marijuana exhibits a price elasticity of approximately one.
But I have the baddest ass paper ever, and it was so much fun to write - twelve hours from start of research to completion of first draft. Final draft not due till december? Oh well. I guess while everyone else tweaks out I can just sit pretty and watch the clouds go by, cause my paper is, for the most part, DONE, bitches.
If you're at all interested in economic models of how drugs are bought and sold,< .
“Square Peg, Round Hole”
Evaluating Prevalent Economic Literature on Illicit Markets
The economics of controlled substances are nothing if not perplexing. Traditional economic theory bases consumer decisions on the assumption of rational behavior, but how can we apply this to a market in which the entire purpose of consumption is to alter one’s behavioral state? Literature on the topic is decidedly scarce due in part to data being sparse and often highly biased, as well as the inherent inability to test hypotheses once postulated. Furthermore, what literature exists succumbs to the pitfall of applying conventional economic theory to a market that is anything but conventional, with one stellar exception from the early 1990s. The general consensus among economists bold enough to delve into the field is that the blanket prohibitions on marijuana, cocaine, and heroin are detrimental both to the economy and society as a whole. [1]
Of the six articles examined, only the two most recent are truly empirical. In The Demand for Illicit Drugs, Saffer and Chaloupka apply results from the National Household Surveys on Drug Abuse to existing models of demand for legal goods in an attempt to determine price elasticity, demand, and cross-complementarity for alcohol, cocaine, and heroin, as well as the effects of decriminalization on the demand curve for marijuana. The authors put forward no hypothesis; instead merely stating observations. The results of their analysis show complementarity between all surveyed substances, with the exception of alcohol and marijuana. Data for alcohol elasticity and demand meshes with previous surveys of the topic, which are entirely more prevalent than those for narcotics. Marijuana decriminalization was found to increase consumption by between 7.6% and 8.4%. Furthermore, marijuana users were no more likely than non-users to ‘move up’ to cocaine or heroin, thus apparently refuting the government’s oft-repeated claim of marijuana serving as a ‘gateway drug’. The authors predict an approximately (~) 10% increase in regular cocaine users, a ~20% increase in occasional/casual cocaine users, a ~50% increase in regular heroin users, and a ~30% increase in occasional heroin users. [2]
A few significant flaws stand out from the article. The sample excludes both institutional and non-institutional residents of group dormitories, i.e. prisoners and college students. Both of these groups display tendencies towards increased narcotics consumption, though their relatively small size as a proportion of the population casts doubt on their ability to affect the survey’s results. Furthermore, the article applies traditional economic theory as it pertains to the relationship of demand and supply in a free market. As we shall see later, illicit or ‘black’ markets do not behave quite as predictably as their legal counterparts, and Saffer and Chaloupka base many of their conclusions on the apparently flawed assumption that a downward shift in the supply curve for narcotics will result in a rightward shift for demand.
Desimone and Farrelly conduct a similar survey in Price and Enforcement Effects on Cocaine and Marijuana Demand using more recent NHSDA results (1990-1997 as opposed to 1988, 1990, and 1991) and simultaneously expand and contract the scope of their study as compared to The Demand for Illicit Drugs. The article explores the effects of marijuana price, cocaine price, and combined narcotic enforcement activity on the demand for marijuana and cocaine, as measured by consumption. The results are unsurprising; on the whole, marijuana demand is almost entirely unaffected by marijuana price, suggesting evidence of a perfectly inelastic market that other authors reviewed later in this paper will corroborate and expand upon. Cocaine demand, however, is undeniably linked to cocaine price. The price of cocaine also exerts some lesser influence over demand for marijuana, suggesting a possible complementary relationship, though nothing as strong as that identified by Saffer and Chaloupka four years earlier. The most significant modifiers of the prices of both drugs, however, are arrest rates. The individual arrest rates for marijuana and cocaine significantly affect demand for both drugs, rather than each affecting its own counterpart. The dominance of this trend in the study leads Desimone and Farrelly to the hasty conclusion that increased expenditure on narcotic enforcement is an effective measure to reduce demand.
Putting a new spin on an old question, Becker, Grossman, and Murphy attempt to explore the effects both price and addiction on demand for narcotics, again measured by reported consumption. A refreshing blend of theory and data, Rational Addiction and the Effect of Price on Consumption applies Becker and Murphy’s 1988 model of addiction as a function of reinforcement and tolerance. In one broad stroke, the authors separate drug users into two distinct groups, each with two subgroups. The young and the poor are presented as more responsive to the price of an addictive good (be it narcotics, cigarettes, alcohol, gambling, etc) and much more willing to discount the risk of negative future effects (represented by a smaller coefficient when converting future detriment to a monetary value), despite attempts at education and deterrence. Older and wealthier consumers, by contrast, respond less to price changes and more to new information regarding the long-term detrimental effects of the behaviors in question. While increases in price and increases in available deterrent literature both have a negative effect on consumption, the differences in response between the two overarching groups are so drastic that one cannot counterbalance the other. Since information is static (a complete reversal of opinion by the scientific community is unlikely at best and impossible at worst), the authors argue that decriminalization would have little effect on demand among older and wealthier users, while drastically increasing consumption among younger and more impoverished ‘addicts’. Empirical evidence is presented as it pertains to cigarette smoking, alcoholism, and gambling, as no definitive data set was available for narcotics. The theory is sound, however, it rests again on the flawed assumption that a decrease in penalties levied against users will increase consumption. In a free and legal market this would make perfect sense, but narcotics markets ascribe to an entirely different set of behaviors, and so despite the alarmist and dire predictions about legalization’s potential to corrupt the young and poor, the entirety of the article must be discounted as improperly thought through. The authors themselves admit in their conclusion, “Clearly, we have not provided enough evidence to evaluate whether or not the use of… …drugs should be legalized.” [3]
Though muted and subtle, both Desimone/Farrelly and Becker/Grossman/Murphy allow their bias to show through in the conclusions to their papers, implying that reduced drug use is a desirable goal for society to strive towards. On the opposite side of the spectrum both stylistically and ethically, Miron and Zwiebel come out in favor of widespread decriminalization in their aptly titled The Economic Case Against Drug Prohibition. Their argument focuses around the secondary effects of the illicit drug trade and its various related externalities, and how the detrimental effects on society would be mostly if not entirely mitigated by implementing a policy of legalization.
A number of salient, rational points are proposed by the authors, most notably the increase in violence associated with any black market business. As they are driven underground by prohibition, the marginal cost of violence experienced by sellers decreases drastically. Furthermore, as sellers and users have no legal recourse to resolve disputes, violence presents itself as a quick, easy alternative to negotiation. As drug related violence receives media coverage, non-users tend to procure more firearms, which are then available for use in domestic or other non-narcotic related confrontations, or discharge accidentally. Cartelization is shown to be well suited to a black market environment, as cooperation makes it easier to avoid the law, as well as employ violence as a tool. The formation of cartels contributes to the reduction in supply and increase in price experienced during prohibition periods, as market structure shifts away from illicit perfect competition and towards illicit oligopoly. [4] As the market shifts away from a zero-profit equilibrium, and there is more money to be had in trafficking, those already in business are more willing to use violence to protect themselves and prevent new ‘firms’ from entering the market.
Not surprisingly, a government attempting to discourage a product has little use for quality controls. Thus, in a black market environment, the dangers of consumption are greatly increased, with users going only on the word of their dealer about the quality of the product. The authors furthermore contend that despite the price increases inherent in a prohibition environment, demand for narcotics is often highly inelastic. To acquire the same quantity of a given drug requires either a larger share of the user’s income to be allocated, or the user’s income to be supplemented. When it cannot be supplemented legally and the user wishes to keep ‘his’ money, income-generating crime (theft, prostitution, gambling) increases as users desperate for their fix attempt to fund their purchases. Busy attempting to combat the drug trade, the police are less able to handle the increase in crime, which spurs the drug trade again, creating a downward spiral.
By means of some half-convoluted logic, the authors attempt to prove that if current benefit did not outweigh future detriment - creating a net gain to society - then no one would use drugs to begin with. Following that train of thought, if all drugs now represent a gain to society, decreased consumption represents a detriment to society, and since prohibition directly results in decreased consumption, prohibition must clearly represent a detriment to society. Staying with the slightly radical and out-there feel of the paper’s middle section, the authors attempt to dispel purported ‘myths’ about the dangers of drug use, arguing that drugs are less addictive than they are made out to be, and even that casual drug users average higher income and productivity than their sober counterparts.
Returning to the realm of rational argument, Miron and Zwiebel run briefly through the negative externalities inherent in the prohibition environment, and present historical evidence pertaining to pre-Prohibition and Prohibition-era America that succinctly proves their points about violence but not much else. After a quick run through of some possible solutions, including the Holland model, the cigarette model, and the medicalization or British model, the authors conclude that while overall consumption would increase slightly in a decriminalized market, the reduction in costs to third parties would outweigh any social detriment from more drug use.
While their paper is largely a Marijuana Reform Party campaign brochure couched in a minute bit of theory, Miron and Zwiebel begin the first baby steps towards recognition of illicit markets as a distinct species within the economic menagerie. Before any of their sociological arguments, they establish the immediate effects of prohibition on a given market. As supplying becomes illegal, risk to suppliers increases greatly. To offset their new non-monetary concerns, suppliers compensate by raising prices. Meanwhile, penalties on users for possession and consumption decrease market demand, however, the increase in supply generally outweighs the decrease in demand, creating an overall decrease in consumption. The net effect on consumption is generally small but always negative, unless the prohibition glamorizes the drug so significantly that the ‘cool factor’ outweighs the forces of the free market.
Back on the conservative side of the fence, Eatherly’s Drug Law Enforcement: Should We Arrest Pushers or Users? tackles a fundamental question of efficiency as it pertains to combating black market distribution networks, while regarding the black market itself with more originality than any of its predecessors (especially given its relatively early publication date of 1974). Eatherly wastes no time in challenging society’s then-current policy of targeting dealers. Dealers, he postulates, are replaceable; while one is in prison another will spring up, eager to make money, and supply the temporarily empty market share, provided another ‘firm’ doesn’t get there first. The author regards penalties for purchase, use, and possession as a tax on the drug community at large, levied in both monetary and non-monetary forms. The trick is to target whichever group is least able to efficiently convert the non-financial sanctions (jail time, loss of employment, etc.) into financial penalties (by hiring lawyers or bribing police). Dealers, being more specialized and familiar with the system, are by far more efficient, so the article advocates targeting users and reducing monetary fines in favor of more jail time. At this point the article begins to let its practicality slip, as Eatherly begins to argue against traditional criminal justice theory (why pay to imprison a user when he can pay you to stay free?). On the very next page he switches gears again and argues in favor of fines for sellers, to provide more revenue and spend less money on the prison system. He fails to take into account the negative externality of property crime as a result of the higher prices that would invariably result from such fines.
Though the vast majority of the paper focuses on his dichotomist plan to jail users and fine sellers, he does bring up an interesting point about collusion between sellers and the police. By keeping the police happy one way or another, individual sellers or cartels can gain a powerful ally in maintaining market share. Who better to remove a competitor from the market than the policeman doing his job? That another dealer tipped him off is evidently irrelevant. This phenomenon has the potential to both prevent entry into the market as well as create a quasi-price floor, as anyone daring to undercut the competition finds himself in handcuffs.
As dated and flawed as it is, Eatherly’s article takes the leap of regarding the entire law enforcement and judicial process as a crucial factor in the behavior of illicit markets. In the deceptively titled Would Harassing Drug Users Work? Li Way Lee takes this idea to an entirely new level. With the inauspiciously stated goal of proving that harassing drug users will not result in a decrease in quantity consumed, Lee proceeds to create a detailed, nuanced, and remarkably elegant model of the narcotics market, flexible enough to be applied to other illicit markets as well.
The first of three key concepts in this model is the idea of separating possession from transaction. Every formula includes transaction or possession penalties in some form or another, and it is often the independent variable Lee uses to predict outcomes based on policies (by either raising or lowering the appropriate penalty to simulate effects of the new policy). Transaction penalties (TP) include the risk of being cheated, robbed, or beaten by a dealer, as well as arrested in the process of procuring narcotics. Possession penalties (PP) include the risk of being caught with a large quantity of narcotics (for harder drugs, penalties increase geometrically as weight increases arithmetically). While keeping a supply on hand allows users to avoid transaction penalties, they face increased possession penalties, and vice versa.
The behavior of drug buyers is therefore represented mathematically, based on Lee’s second crucial principle: unitary elasticity. [5] Lee argues that any given consumer will not allocate different portions of income to drugs based on the market price, merely purchasing less with the same amount of money. Thus, as TP increases, users consume less, make fewer purchases, and increase their stockpiles. Conversely, as PP increases relative to TP, users still consume less, make more purchases, and keep a smaller stockpile on hand.
. Retail sellers are observed to be highly decentralized, often only doing business with 10 to 15 customers. Competition is high on the street level and remains so all the way up the supply chain, as both consumers and suppliers have a wealth of information at their disposal (friends, books, internet, past experience, etc) to determine if a seller’s price and quality are up to expectations. Retail sellers also often shift fiscal risk up the supply chain, borrowing drugs from their own supplier on consignment (thus preventing some personal loss in the event of a robbery or bust). The supply schedule changes based on market price and transaction frequency, which are themselves linked directly to demand.
The behavior of drug dealers is represented mathematically as a function of buyer behavior. The heart of Lee’s model rests here, in the idea that all supply shifts are demand driven in some form or another. Since the market is perfectly competitive for the most part, sellers must cater to users, thus user behavior directly affects sellers, and thus enforcement policies affecting users also affect sellers. A higher TP, for instance, will result in fewer transactions, each consisting of a higher quantity. This has the direct result of lower risk for the seller, as one less sale is one less chance for him to get arrested. The marginal cost of each transaction drops with the risk, and the price drops with the marginal cost. Supply shifts to the right, as dealers feel safer and begin selling larger quantities (to provide for the stockpiles users build up as TP rises). Conversely, a higher PP means more transactions for the seller, creating more risk that he will now charge for accordingly. Marginal cost rises, quantity sold decreases, and price increases.
With this new model in hand, Lee proceeds to check and see if historical examples will validate his equations. Applying the theory to marijuana legalization in 1972, we find consumption actually did not increase. Decreased penalties resulted in proportionately lower transaction costs. Lowered transaction costs, according to the theory, lead to increased demand, as the now-safe buyers look for skittish dealers, who decrease supply in favor of safety. Furthermore, less police investigating and finding buyers means that many more police to track down the dealers, further increasing risk, marginal cost, and decreasing supply. Whatever demand increase occurred after legalization was more than counteracted by the forces of illicit market theory at work.
Similarly, the theory comes up with a plausible explanation for why supply of cocaine and heroin actually increased during the second half of the 1980s, at the height of the War On Drugs. With increased numbers of arrests, transaction costs rose, resulting in less frequent transactions overall. Concurrently, decreased user penalties for possession reduced possession costs, increasing incentive for users to stockpile and further reducing overall transactions. With marginal cost now so low, supply was free to rise.
Combined with the law of diminishing marginal returns rearing its head over an already sevenfold increase in narcotic enforcement spending over the last decade, the model easily proves Lee’s hypothesis correct. More important, though, is that the economic community has a model with which to experiment before implementing policies blindly. Just as a right shoe does not quite fit on a left foot, so was conventional market theory somewhat unsuited for application to a market where transactions lack all the capitalism-friendly protections of a modern Western society. Rather the opposite: the society is actually brought to bear against the market.
This is not to say that the previous five articles are based in fiction, or that their hypotheses are incorrect. Eatherly’s points are for the most part nothing short of asinine. Miron and Zwiebel practically package marijuana in with the article, so unabashedly do they advocate for its legalization, while Becker, Grossman, and Murphy rest on their laurels from the late 80s and make statements as bold as a mouse in a lightning storm. The two statistical surveys are just that - statistical surveys, proving correlations between variables, but perhaps placing too much faith in their subsequent predictions. By contrast, Lee’s article (more a vessel for his model than an article in and of itself) represents a breakthrough within the field of economics, and an invaluable tool for policymakers open-minded enough to accept that their market theory-derived policies cannot function if their target refuses to behave as classical markets ought.
[1] N.B. This paper is not intended to serve as a forum for legalization advocacy, and all opinions expressed herein are those of the respective authors cited.
[2] These samples assume a 50% price reduction in narcotics post-legalization.
[3] Becker; Grossman; Murphy Rational Addiction and the Effect of Price on Consumption pp. 241
[4] The supply reduction phenomenon of illicit markets is further explained in reference to Li Way Lee’s Would Harassing Drug Users Work? For the time being, it should be assumed as a given.
[5] Lee cites Nisbet and Vakil 1972 as proof that marijuana exhibits a price elasticity of approximately one.