Tuesday, 22 March 2016

Economics and the war on drugs

Last week in the Waikato Economics Discussion Group, the students debated legalisation of marijuana. I'm really enjoying the informal debate style we have adopted, where students are randomly assigned to one side or the other, and might have to develop arguments counter to their prior beliefs. I think the pro-legalisation group came out slightly ahead on the day.

However, this post is less about EDG or marijuana legalisation, and more about the war on drugs more generally. Last month, Tom Wainwright wrote a piece in the Wall Street Journal on "How economists would wage the war on drugs". Essentially, the war on drugs is being lost. Badly. As Wainwright notes:
The number of people using cannabis and cocaine has risen by half since 1998, while the number taking heroin and other opiates has tripled. Illegal drugs are now a $300 billion world-wide business, and the diplomats of the U.N. aren't any closer to finding a way to stamp them out.
This failure has a simple reason: Governments continue to treat the drug problem as a battle to be fought, not a market to be tamed. The cartels that run the narcotics business are monstrous, but they face the same dilemmas as ordinary firms--and have the same weaknesses.
So, what's the deal here? Why is the war on drugs going so badly? The war on drugs is essentially based on restricting the supply of drugs, whether by destroying drug crops or manufacturing activities, intercepting drugs in transit, or jailing drug dealers and bosses, etc. The fundamental problem with targeting supply is that, if effective, it results in higher drug prices, as shown in the diagram below. Reducing drug supply from S0 to S1 does reduce the amount of drugs consumed (from Q0 to Q1), but increases the price from P0 to P1. The higher price provides incentives for other suppliers to enter the drug market, shifting the supply curve back to the right (towards S0), and undoing any good that might have come from the reduction in supply.

However, supply of drugs might not even be appreciably reduced when drug crops are targeted. Wainwright points out that:

  1. Drug cartels are a monopsony - they are a single buyer of Andean coca leaves, so they have market power over the price of leaves (i.e. the cartels have the ability to strongly influence the market price of coca leaves). So if some crops are wiped out, the price is unlikely to rise because of the cartels' market power.
  2. The price of cocaine is so much higher than the crop input costs that even a large increase in crop prices would have little effect on the market price of cocaine (i.e. even a big increase in the price of coca leaves would lead to only a small shift in the supply curve for cocaine).
A further problem arises because demand is relatively inelastic - the quantity of drugs demanded does not reduce by much even if the supply reduces (this is why the demand curve is relatively steep in the diagram above). So any reduction in supply is translated into price changes rather than quantity changes.

A more effective approach then, may be to target demand (as I've noted before). Reducing demand, from D0 to D1 in the diagram below, reduces both the quantity of drugs consumed (from Q0 to Q1), and the price (from P0 to P1). Even though this change results in the same quantity reduction as the supply shift shown in the diagram above, it is likely to be more effective in the longer term as the lower price reduces the incentive for other suppliers to enter the market and undo the good work of reducing demand.

How then, to reduce demand? Wainwright writes:
Demand-side interventions are not only more effective, they're also considerably cheaper than playing about with helicopters in the Andes. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America; spending it on treatment for addicts reduces it by 10 times as much. Rehab programs for prescription-painkiller users might seem costly, but they prevent those people from slipping into the colossally more expensive problem of heroin addiction. Where demand cannot be dampened, it can be redirected toward a legal source, as a few U.S. states have done with marijuana--a development that has inflicted bigger losses on the cartels than any supply-disruption policy.
So, if an economist was running the war on drugs, it would likely look a lot different - more rehab programmes and fewer helicopter gunships.

On a final note, Tom Wainwright has a new book, entitled "Narconomics: How to Run a Drug Cartel", which I've just ordered a copy of. I look forward to reviewing it in a later blog post.

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