Mark Kleiman on the economics of fentanyl

On the Reality Based Community blog, Mark Kleiman has an excellent post on the fentanyl epidemic in the U.S. It is difficult to excerpt, as it is pretty thoroughly written. There are lots of excellent bits on the economics of fentanyl, so is well worth your time reading. It especially explains why the epidemic of fentanyl use is a recent problem, even though fentanyl has been around for over 60 years. The short version of the story can be summarised as:

• Fentanyl in the 1980s was good from the dealer's perspective, as it was high value-to-bulk, so it could be transported cheaply, but from the buyer's perspective it was 'Russian roulette', because diluting accurately into a form that wouldn't potentially kill the user was very difficult;
• Besides which, heroin was really cheap so users preferred it as a cheaper substitute, which kept demand for illicit fentanyl low;
• Then in the 1990s, oxycodone (and hydrocodone) became increasingly available, and didn't require buyers to interact with dodgy dealers since they could buy the pills from "their favorite script-happy M.D. or “pill mill” pharmacy", so demand for these drugs increased;
• The continuing fall in the price of heroin, alongside cracking down on diverted oxycodone and hydrocodone, encouraged buyers to switch to heroin as a cheaper substitute;
• Chinese sellers entered the market for fentanyl, using the Internet and delivering via the standard mail service, and this increase in supply greatly lowered the price of fentanyl to direct buyers, and the wholesale cost of fentanyl for dealers;
• This led to fentanyl becoming a cheaper substitute for dealers to sell; and
• Some new innovation allowed dealers to dilute fentanyl in a way that was much less likely to kill users.

All of which led to:

And for a retail heroin dealer, the financial savings from buying fentanyl (or an analogue) rather than heroin, and the convenience of having the material delivered directly by parcel post rather than having to worry about maintaining an illegal “connection,” constituted an enormous temptation.

This lends itself well to using a supply-and-demand model to show what is going on in the market for fentanyl, as per the diagram below. There are effects on both the demand side and the supply side. On the demand side, there has been an increase in demand (from D0 to D1). This isn't because of the change in price of fentanyl (since that would simply mean a movement along the demand curve). It is because there is less risk (of death) to buyers because the sellers are better able to dilute fentanyl (though I will come back to this point later in the post). On the supply side, there has been a large increase in supply (from S0 to S1), because of the reducing costs of production and distribution of fentanyl (cheaper sources of supply from China, along with more sellers). The combination of the increase in demand and greater increase in supply have led to a decrease in the price of fentanyl (from P0 to P1), and an increase in the quantity of fentanyl consumed (from Q0 to Q1).

But if fentanyl is now safer because, as Kleiman wrote:

Somewhere in here someone figured out a technique for diluting the stuff with enough accuracy to reduce the consumer’s risk of a fatal overdose: far from perfectly, but enough to create a thriving market. (I don’t know what that technique is, though I can think of at least one way to do the trick.)

Then why have the number of overdoses greatly increased? It's probably because the number of uses (and number of doses) has greatly increased (as per the supply-and-demand diagram above). A larger number of doses consumed multiplied by a lower per-dose risk of overdose could easily lead to more total deaths than a smaller number of doses consumed multiplied by a high per-dose risk. Which has led to this:

[HT: Marginal Revolution]