Lecture Introduction to economics: Social issues and economic thinking: Chapter 15

Chapter 15 - The economics of illegal drugs. After completing this unit, you should be able to: Describe the incidence of drug use, model the externalities associated with drug use, describe the incomplete information problem associated with drug use,…

Introduction to Economics: Social Issues and Economic Thinking

Wendy A Stock

PowerPoint Prepared by

Z Pan

Chapter 15

the economics of illegal drugs

Ø Describe the incidence of

drug use

Ø Model the externalities

associated with drug use

Ø Describe the incomplete

information problem

associated with drug use

Ø Appraise the policy responses

Copyright © 2013 John Wiley & Sons, Inc.

After studying this chapter, you should be

able to:

Ø War on Drugs began in the 1970s

Ø Against heroin, cocaine, crack, marijuana,

The Incidence of Drug Use in U.S.

The Market for Drugs

Ø Externalities occur when some of the costs or benefits of a trade are imposed on people

outside the trade

Ø Negative externalities are costs that are

imposed on third parties

Ø Positive externalities are benefits that are

imposed on third parties

Market Failure: Externalities

Ø Private marginal costs are marginal costs that accrue only to the producers of a good or

service

Ø Social marginal costs are marginal costs that accrue to society as a whole

Ø MCsocial = MCprivate + Negative Externality

Private vs Social Marginal Costs

Negative Externality in Drug Market

Ø Imperfect information occurs when demanders

or suppliers do not know the true costs and

benefits associated with a good or service

Ø e.g cigarette industry

Market Failure: Imperfect Information

Ø Laws that illegalize drug use

Ø Prevention and treatment programs

v1970s - methadone clinics

v1980s –

§ “Just Say No” campaign

§ D.A.R.E program

§ Montana Meth Project (MMP)

Fighting Drugs: Demand-side Policies

Impact of Demand-side Policies

Ø Interdiction (disrupting transport of drugs), 2.5 billion dollars per year

Ø Destroying drug production facilities, eradicating crops

Ø Pressuring foreign governments to help reduce exports of drugs to U.S

Fighting Drugs: Supply-side Policies

Impact of Supply-side Policies

Ø When the demand for drugs is relatively elastic , supply-side

policies cause the quantity of drugs used to fall dramatically

from Q to Q'.

Importance of Elasticity of Demand

Ø When the demand for drugs is relatively inelastic , supply-side

policies do not generate very large reductions in drug use, but

do cause large increases in drug prices.

Importance of Elasticity of Demand

Ø Results of Supply-side policies

§ large reductions in quantity and small increases in price for marijuana

§ large increases in price but only small reductions in quantity

Policy Implications of Elasticity

Ø Personal Use of Marijuana by Responsible Adults Act in 2009

Ø 16 states allow for legal use of marijuana for medical

purposes

Ø Impacts on Children?

Ø Historical experiences in legalizing illegal goods/services

§ Abortion (Roe v Wade in 1973)

Economics of Legalization

Ø Higher Demand due to:

§ Costs of using it (fines and imprisonment) fall

Ø Higher Supply due to:

§ Risk of fines and imprisonment for producers falls

§ Production and transportation costs fall

§ Better production technology

Ø Safer drug under regulation?

Factors Affecting Demand & Supply

What would happen to the price of marijuana?

Potential Impacts of Legalization

Taxing drugs like pollution

Addressing Negative Externalities

1. In 2011, 16 states had enacted laws

legalizing medical marijuana How would the legalization of medical marijuana affect the market for illegal marijuana?

2. Would legalizing drugs reduce

crime? Why or why not?

Key Concepts