Download Phillips/Econ Winter 2012 Casual Users, Substance Abusers, and

Phillips/Econ
Winter 2012
Casual Users, Substance Abusers, and Public Policy: A War on Drugs-1
Social views about the desirability of consumption of a drug like cocaine vary over
time within a society, as well as among locations within a country, and among societies.
We all know that coca cola once lived up to its name and that cocaine, as well as
alcohol, was the chemical base for popular elixers at the turn of the century. This
variability in social attitudes is characteristic of "black-market" commodities and is one
of the reasons that they are the centerpiece of political and social movements such as
prohibition as well as the counter-movements such as repeal.
There are a number of philosophical points of view that add to the controversy.
One is consumer sovereignty and the related issue of "victimless" crime. The English
philosopher and economist John Stuart Mill believed that the role of the government did
not include protecting responsible adults from their own behavior.
The notion of
consumer sovereignty is that consumers, at least adult consumers, know what is best
for themselves, and hence cannot be victims of their own behavior. This may make
sense for casual drug users.
But how about alcoholics and heroin addicts, do these arguments hold for them or
is not abuse an illness? Once again, it is important to distinguish between different
populations and to recognize the inherent heterogeneity of the substance use versus
abuse problems.
Different problems may require different models of analysis and
different solutions.
And how about externalities? The intravenous drug addict may contract AIDS and
pass it on to their newborn child, directly in the case of the mother-addict or indirectly
for the father-addict who also may infect the mother. Certainly with this example, we
are no longer talking about "victimless" behavior.
So how are we to choose between market solutions versus criminalization and
enforcement? In the case of behaviors with externalities that impose costs on others,
the government can regulate the behavior, tax the source of the externality, or create
property rights, for example the right to pollute, which can be purchased for a price.
With alcohol and tobacco, for example, we see regulation in some states, such as "blue
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laws" which set the hours and days of the week when alcoholic beverages can be sold.
In some localities, alcoholic beverages can only be purchased from government liquor
stores. Within the last few years, a no smoking ban has been instituted on domestic
flights. We also see taxes on these commodities.
The argument that follows is drawn from the analysis in Bergstrom. Consider a
commodity such as marijuana and start with an unfettered market with demand by
casual users and supply by producers with the market clearing price, p, and quantity, q,
as illustrated in Fig. 1.
If the social perspective is consumer sovereignty, then a
measure of social welfare is the sum of consumer surplus plus producer surplus.
Consumer surplus arises because the consumers who would have been willing to pay a
higher price at amounts less than q, enjoy a bargain at the price p. Producer surplus is
profit or net revenue, which is the difference between gross revenue, p times q, and the
costs of resources used for supply, which is the area under the supply curve, as
illustrated.
------------------------------------------------------------------
Price
Demand
Supply
S
Consumer
Surplus
p
Producer
Surplus
Cost of
Production
S
q
Quantity
Figure !: Unfettered (free) Market for Pot, Consumer
Sovereignty
-----------------------------------------------------------------If society thinks that the consumption of pot is a bad thing and makes it illegal,
then consumer sovereignty goes by the board and consumer and producer surplus is
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not counted. For example, income generated by illegal activities is not counted as part
of Gross National Product (GNP). For that matter, neither is the value of the goods and
services in the home produced by housewives and/or househusbands, so one can see
once again that value judgments play a role in these matters.
Suppose that society enacts a law against the supply of marijuana and tries to
enforce the law by targeting pot growers. Suppose law enforcement can discover and
confiscate half of what suppliers grow, but then sells what was confiscated in the open
market. There is no other sanction save confiscation. Suppose under the free market
you grew two equal size plots of marijuana each yielding $10,000 per year. Under
enforcement, you would expect to be able to sell the harvest from one, and would
demand $20,000 per plot in order to obtain the same reward for your efforts. Of course
the government sells the harvest from the other plot at the market price, so that the
same amount of marijuana goes to market as before, but at twice the price. This new
supply curve, S'S', with double the price of each q compared to the free market supply
curve, SS, is illustrated in Fig. 2.
Enforcement has been successful in restricting
consumption to q', less than q, raising price to p', higher than p.
-----------------------------------------------------------------S'
Price
Supply with a 50% Chance of
Confiscation & Gov't. resale
Demand
S
b=p
p'
Supply in a Free
Market
p
S' a
S
a
b=p
q'
q
Quantity
Figure 2: Criminalization of the Private Supply of Pot, 50
% Chance of Confiscation, Government Resale
------------------------------------------------------------------
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If raising price and lowering consumption is the goal, enforcement
can do even better by burning the marijuana seized. In this case, half the amount that
reached the market in the case of the supply curve S'S' will now be sold and the new
supply curve will be S'S" as illustrated in Fig. 3, to the left of S'S'. Price is even higher at
p", and consumption lower at q". Of course a lot of consumer and producer surplus has
been lost, compared to the free market case, as illustrated by the shaded area, but
society doesn't count this any more if the goal is to reduce consumption.
-----------------------------------------------------------------Supply with a 50% Chance of Confiscation & Gov't Destruction
S''
Price
c
S'
Supply with a 50% Chance of
Confiscation & Gov't. resale
c
S
p''
Supply in a Free
Market
b=p
p'
p
S' a
S
a
b=p
q'' q'
Loss of Social Welfare
From Enforcement,
Presuming Consumer
Sovereignty
Demand
q
Quantity
Figure 3: Criminalization of the Private Supply of Pot, 50
% Chance of Confiscation & Government Destruction
-----------------------------------------------------------------It may be possible to raise price to p" and restrict consumption to q", without
making marijuana illegal or resorting to enforcement. This can be accomplished with a
tax. Referring to Fig. 4, SS is the market supply curve with no tax, as before, and S'S'
is the supply curve with a 50% tax rate. If you received $50 per ounce before the tax,
you will ask for $100 per ounce, pay $50 as tax, and keep the amount of your pre-tax
earnings. This raises the price to p' and restricts consumption to q'. If the government
wants to restrict consumption further, it could buy up marijuana using the tax revenue,
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p'q'/2, which is half of total sales, p'q'.
This would shift supply to S'S", raising price to p" and lowering price to q". This is
a balanced budget policy since the government spends all the tax revenue on the buy
program. However, they no longer have to spend for enforcement to find, confiscate,
and burn marijuana. They may have to spend a little on Treasury agents to stamp out
"revenuers" or "moonshiners", illegal pot growers who break the law by selling without a
tax stamp.
------------------------------------------------------------------
S'' Supply with a 50% Excise Tax with
the Gov't. Using Proceeds To Buy Pot
S'
Price
c
Supply with a 50% Excise Tax
c
S
p''
b=p=tax
p'
Supply in a Free
Market, No Tax
p
S' a
S
a
b=p
q''
q'
Demand
q
Quantity
Figure 4: Decriminalization: Using an Excise Tax to Control
Pot and to Internalize Externalities
.-----------------------------------------------------------------From this example, it is clear that a tax can raise price and restrict consumption
much more cheaply than enforcement. The legal market crowds out the illegal market.
Furthermore, the enforcement policy may not even be feasible, since it assumes that
half the marijuana supply can be found and confiscated. Optimistic estimates often run
closer to a 10% discovery rate for supply interdiction.
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So why is crack and heroin illegal? Well, why is alcohol now legal and taxed,
when it was once illegal? Health workers see babies born addicted to crack, certainly
innocent, certainly victims, and see a bad, an externality, they want to eliminate.
Consequently, crime is like pollution, and we have learned in this class that the optimal
level is not zero because control is costly. But the moralist wants to eliminate the bad
and take a moral stand. Keeping a commodity legal may help keep it controllable,
rather than driving it underground, but a free market with a tax as a control does not
take a stand on morality and consequently say this commodity is bad.
If we want to opt for taxation rather than criminalization to control the consumption
of substances, then it is important that consumers are informed about the risks from
consumption. Education and warning labels must play a role in informing the consumer
or casual users of the risks. Furthermore, we must worry about the casual consumers
who slip over the line and become substance abusers. Health care must play a role in
helping the substance abusers who may no longer be able to govern their own
behavior.
Decriminalization restores consumer sovereignty, but there is the social
responsibility of worrying about externalities, such as the unfortunate who become
substance abusers. They need medical care. Who will pay? Recall in the class
discussion of speeding that the difference between the private cost and social cost of
speeding was the externality or risk of damage imposed on others. A tax is a social
instrument for internalizing that externality, that is, making the social cost the new
private cost. If we were able to monitor the speed of each car, we could tax miles per
hour. Since speeding is a non-market activity, this would be costly, requiring a "blackbox" similar to those for airliners. However, for substances, if there is a legal market, an
excise tax is a cheap social instrument for internalizing the externalities or damages
from consumption. We can choose a tax rate such that the tax proceeds will equal the
externalities, i.e. the damages imposed on others. Note that in Figure 4, the supply
curve S'S', with the excise tax imposed, lies above the private supply curve SS, which
only reflects the private costs of supply, and thus lies below the social cost curve S'S'
which includes both private costs plus externalities. The government could use the tax
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proceeds, p'q'/2, to finance medical care for substance abusers. Some might argue that
substance abusers knew and assumed the risks of consumption and that they are not
evidence of externalities. A more charitable view is that they are sick and it is part of the
social price of enjoying decriminalization and consumer sovereignty to take care of
them by imposing an excise tax and devoting the proceeds to their health care.