Assessment of Two Cost-Effectiveness Studies on Cocaine Control Policy (1999) / Chapter Skim
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2 The RAND Study
2 The RAND Study
Pages 8-28
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From page 8... ...
The study then uses the model to assess the cost-effectiveness of four alternative strategies for reducing cocaine consumption: source-country control, interdiction, domestic enforcement, and treatment of heavy users. Modeling the Market for Cocaine: Qualitative Features The RAND model seeks to explain the aggregate consumption of cocaine in the United States as the outcome of a long-run competitive market process in which the price of cocaine adjusts to balance supply and demand.
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From page 9... ...
Hence, the second and third assumptions together imply that average cost declines with quantity produced. In the RAND model, cocaine control policies would reduce the con
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From page 10... ...
The result would be a new equilibrium with a higher price and lower consumption than would be observed in the absence of such policies. Drug treatment programs and other demand-control policies would shift the demand curve down, while leaving the average cost curve unchanged.
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The "elasticity of market supply" parameter measures the sensitivity of quantity supplied to price. The RAND supply model requires that the average cost curve in Figure 1 be downward sloping; hence, the study
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From page 12... ...
entertains only negative values for the supply elasticity parameter. The baseline analysis assumes that the price elasticity of supply equals -3.6, implying that a 3.6 percent decrease in the quantity supplied requires a 1 percent increase in average costs (Table E.1~.
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From page 13... ...
That is, a dollar increase in average cost at any stage of production leads to a dollar shift upward in the industry average cost curve shown in Figure 1. The RAND study assumes that increases in the budget for supplycontrol activities generate additional seizures of cocaine and that seizures increase production costs.
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From page 14... ...
In the baseline analysis, the least costly supply-control policy is domestic enforcement. The study predicts that spending on domestic enforcement, which in the RAND model acts to increase the average cost of production and reduce consumption by those who are arrested, would have to increase by $246 million to reduce cocaine consumption by 1 percent; in contrast, spending on treatment of heavy users would have to increase by only $34 million.
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From page 15... ...
The central finding that treatment of heavy users is much more cost-effective in reducing cocaine consumption than are supply-control policies depends on assumptions that are too questionable to guide the formation of cocaine control policy. The rest of this chapter details the committee's main concerns: the RAND estimates of effects of drug treatment programs, the models of cocaine supply and cocaine demand, and the study's efforts to evaluate the model posed.
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From page 16... ...
Hence, it is not clear that the TOPS data provide information relevant to the evaluation of current treatment programs for heavy cocaine users. Inferential Problems Even if the TOPS data did accurately characterize cocaine treatment programs for heavy users, the RAND interpretation of the data is open to 3ToPS is one of three comprehensive studies of drug abuse treatment effectiveness sponsored by the National Institute on Drug Abuse (NIDA)
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From page 17... ...
In contrast, to the extent that users are mandated into treatment by the criminal justice system, it may be that people who enter treatment programs tend not to be so motivated.5 Thus, observed declines in drug use during the period of treatment may reflect the characteristics of people who seek or are coerced into treatment, not the effects of treatment programs. The true intreatment effect may be much lower or higher than the estimate in the RAND study.
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From page 18... ...
Even if the in-treatment and post-treatment parameters are evaluated correctly in the RAND study, these values pertain only to people of the TOPS sample, that is, only to people who actually were enrolled in treatment during the period of TOPS data collection. Expansion of treatment programs from their historical levels to the higher levels contemplated in the RAND study may require reaching out to groups of drug users who have neither sought treatment nor been coerced by the criminal justice system into receiving treatment.7 These groups may be much more or much less susceptible to successful treatment than are the members of the TOPS sample: it is simply not known.
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From page 19... ...
Shape of the Average Cost Curve Inferences on the effects of supply-control policies depend critically on the assumed shape of the average cost curve. The RAND supply model, described above, assumes that price equals the average cost of cocaine production, that the marginal cost of production is constant, and that the level of seizures grows at a slower rate than the quantity of cocaine produced.
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From page 20... ...
Changes in any of the three RAND assumptions could easily generate an upward sloping market average cost curve for cocaine. A sensitivity analysis can explore the range of plausible assumptions, but the RAND sensitivity analysis only entertains downward sloping curves.
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The analysis in the appendix indicates that the RAND assumption of a downward sloping average cost curve restricts the responsiveness of equilibrium cocaine consumption to the intensity of supply-control activities. Consider, for example, the setting of Figure 2, which is based on the market model in the appendix.
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From page 22... ...
Thus, given the model presented in the appendix, the responsiveness of consumption to the increased intensity of supplycontrol activities will be understated if the market average cost curve is incorrectly assumed to be downward sloping.l° Supply-Control Policies and Average Production Costs A major issue in assessing supply-control policies is the way that disruptions at different stages of the cocaine production and distribution process generate increases in average production costs. The RAND study assumes that the mechanism is additive: that is, a dollar of cost added at any stage of the process implies a dollar increase in average cost.
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From page 23... ...
finds some evidence for a multiplicative model of the cocaine market and rejects an additive model. The question of pass-through of raw materials costs into the costs of final products has been studied much more extensively in some legal markets for which extensive wholesale and retail data are available.
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From page 24... ...
Nonprice Effects of Supply-Control Activities The RAND model assumes that supply-control activities affect the drug market by raising production costs and, hence, equilibrium drug prices. The operation of illegal markets, such as that for cocaine, however, may be more complicated than the operation of the simple legal markets in competitive models of market equilibrium.
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From page 25... ...
The initial condition of equilibrium consumption of cocaine is point A The baseline average cost curve is downward sloping, as assumed in the RAND model.
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From page 26... ...
The Complex Response of Cocaine Consumption to Prices The RAND demand model, with its single price elasticity of demand parameter, abstracts from much of the complexity of the behavior that determines cocaine use. As noted above, supply-control policies may affect cocaine use by altering the search costs, stigma, and other nonmonetary factors relevant to current and potential cocaine users.
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From page 27... ...
As discussed above, plausible changes to the RAND assumptions about the effectiveness of treatment programs and the shapes of the demand and average cost curves might well modify or possibly even negate the study's findings. Hence, the committee concludes that the findings lack sufficient persuasiveness to be used as a basis for policy formation.
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From page 28... ...
The study is also seriously deficient in its use of the Treatment Outcomes Prospective Study (TOPS) data to estimate the effectiveness of cocaine treatment programs.
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