Understanding the Demand for Illegal Drugs (2010) / Chapter Skim
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2 Markets for Drugs
2 Markets for Drugs
Pages 17-36
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From page 17... ...
It first lays out the basic demand-and-supply analysis framework and explores the strengths and limitations of the basic models, and then considers three distinctive features of illegal drug markets: 1. the role of imperfect information: the fact that sellers and buy ers are uncertain about the quality and quantity of drugs in a transaction; 2.
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, but the standard economic model has key limitations in understanding illegal drug markets. The implicit features of many legal markets in modern economies -- for example, quality certification and available legal mechanisms to guard against fraud -- are typically absent from illegal drug markets.
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If sellers can shift sales activities indoors or otherwise avoid the increased enforcement, the shift from S1 to S2 will be small. The standard model assumes that the market price adjusts until an equilibrium is reached at which the quantity demanded equals the quantity supplied.
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In similar fashion, the price elasticity of supply denotes the percentage change in the quantity of drug supplied given a 1 percent increase in the price.1 One might assume, based on the commonsense notion of addiction, that drug demand is relatively inelastic or unresponsive to prices, which is the assumption behind Figure 2-1. However, as we discuss in more detail below, the price elasticity of demand varies across drugs (heroin, cocaine, marijuana)
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suggest, based on early ethnographic work, that heroin addicts may have a fixed budget for all items other than heroin, representing the minimum that is needed for shelter, food, and clothes; if so, there would be unitary price elasticity. In contrast, more affluent users of marijuana, for whom the drug accounts for a small share of their total incomes, may change their total consumption very little in response to price increases.
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If social harms associated with illegal drug use are positively related to the dollars spent on these substances (since these are criminal incomes) , demand-side interventions are especially attractive because they induce favorable price and quantity effects, while supplyside interventions generate only favorable quantity effects.
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The markets for an agricultural product like wheat might approach this ideal. Yet in many respects, conditions in the markets for illegal drugs seem to dramatically depart from the textbook model.
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Many heavy users of illegal drugs engage in some drug selling, with the proportion of seller-users differing by substance (see National Institute of Justice, 2003)
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Although it has been hard to pin down the magnitude of the price responsiveness (as summarized by the price elasticity of demand) , there is general empirical support for the proposi tion that drug demand curves slope downward.
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As noted above, it is impossible to assess policies aimed at the demand side of a market without some basic understanding of the supply side. A comparatively small economic literature examines points of similarity and departure between the supply side of the illegal drug market and standard economic accounts (for a useful review, see Rhodes et al., 2007)
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From page 27... ...
, which found that compensation for the risks of deaths, injury, and incarceration accounted for approximately $21,000 per dealer annually. Supply-side intervention can thus increase retail drug prices by increasing the risk of incarceration and by increasing several other com ponents of costs, such as seizures of drugs and assets.
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Drug users, and even drug deal ers, do not know the exact number of grams of pure drug in the dime bags they exchange. As a result, there is great dispersion in the drug prices paid.
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The covert nature of illegal drug markets means that prices and quantities are not easily observed, if at all, but some guidance can be found in studies of legal markets. In competitive markets that display constant returns to scale, supply curves tend to be more elastic than demand curves.
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, Chicago (National Drug Intelligence Center, 2007a) , and Los Angeles (National Drug Intelligence Center, 2007b)
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If Q is the means quantity consumed between active users, P ∂Q ε conditional = . Q ∂P Total price elasticity of demand represents the percentage change in total consumption corresponding to a unit percentage change in price.
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The inconsistent estimates in Table 2-1 demonstrate that in many cases, econometric analysis of aggregate data will not yield useful information about the price elasticity of the demand for illegal drugs.
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CONCLUSION The basic supply-and-demand approach from economics provides a useful analytical framework to understand markets for illegal drugs. On the conceptual side, we draw two main lessons.
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. Toward the development of a typology of illegal drug markets.
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. Informing America's Policy on Illegal Drugs: What We Don't Know Keeps Hurting Us.
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From page 36... ...
. Illicit Drugs: Price Elastic ity of Demand and Supply.
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