Download Economics of Drug Prohibition

Economics of Drug Prohibition
Econ 3670 Applications of Choice Theory
Roberto Martinez-Espiñeira
1
Introduction
• According to conventional wisdom, illicit
drugs may be responsible for a broad
range of social and personal ills,
including
• Crime
• Diminished health
• Reduced productivity
1
Introduction
• Popular thinking attributes these ills
mainly to the characteristics of drugs
themselves
– e.g. the psycho-pharmacological effects of
drugs make users commit violent and other
crimes
– the mind-altering and addictive properties of
drugs cause users to suffer poor health or
diminished productivity
2
Introduction
• The libertarian economist argues that
the social and personal ills typically
associated with illicit drugs have little
to do with drugs themselves; instead,
they result from the economic
incentives created by drug prohibition
– Libertarian economists include Milton
Friedman, James Buchanan, and Friedrich
von Hayek (all Nobel Laureates) as well as
Thomas Sowell and Robert Barro
3
Introduction
• This lecture details the thinking of a
libertarian economist towards the issue of
drug prohibition
• You may not agree with many of the
views which follow, but they will
challenge you to think more deeply about
the issue
4
Prohibition and the demand for
drugs: theory
• Prohibition potentially reduces demand
for drugs via several mechanisms
– Fosters a social norm that drug use is
wrong, thereby discouraging use
– This effect is hard to quantify since norms
are difficult to measure
– Further, prohibition might increase
demand by glamorizing drugs or creating
a forbidden fruit
5
Prohibition and the demand for
drugs: theory
• Prohibition can also reduce demand by
those who exhibit ‘respect for the law’
even if such persons do not believe drug
use is wrong
– Little direct evidence on this effect
• Violation of certain other laws is common
(speeding laws, tax laws)
• Degree of non-compliance suggests caution in
assuming that respect for the law, per se,
substantially reduces the demand for drugs
6
Prohibition and the demand for
drugs: theory
• Prohibition can reduce the demand for drugs by
sanctioning the purchase or possession of drugs
(heavy fines, jail terms etc.) but the impact of these
sanctions on demand is probably modest
• Actual penalties for possession usually far below
maximum
• There are many arrests for drug possession, but there
are also many drug users, and the number of
purchases or ‘possessions’ is far larger than the
number of users
• Many of the arrests that do occur are incidental to the
commission of other crimes (prostitution, theft, etc).
• So, persons who are otherwise law-abiding face
minimal chances of arrest for drug possession
7
Prohibition and the supply of drugs: theory
• Prohibition can also affect the supply of drugs
via several mechanisms
– Reduces supply by imposing costs that would not
be borne by legal suppliers
– Produce, transport, distribute drugs secretly or
bribe law enforcement officials to look the other
way
– However, black market suppliers face low marginal
costs of evading tax and regulatory policies that
ordinarily add costs for legal suppliers
– Income taxes, excise taxes, environmental
regulation, safety and health regulation, child labor
laws, minimum wage laws etc.
7
Prohibition and the supply of drugs: theory
• Prohibition can also affect the supply of
drugs via several mechanisms
– It is conventional wisdom that banning drug
sales will in increase the price because of
increased costs
– Economists suggest that the increase may
be less than suggested and that it is an
empirical question
– This is because prohibition increases some
costs but reduces other costs
8
Prohibition and the supply of
drugs: theory
• The impact of prohibition on market power
– Prohibition facilitates evasion of anti-trust laws,
thereby increasing market power, or lowers the
marginal costs of extreme punishments (violence),
thereby enhancing the potential for collusive
agreements
– Alternatively, the arrest and incarceration of a
dominant supplier can encourage price wars among
the remaining suppliers as they compete for the
arrested supplier’s market share
– Thus, the net effect of prohibition on market power
is ambiguous and depends on both the level and kind
of enforcement
9
Prohibition and the supply of
drugs: theory
• Overall, the evidence suggests that prohibition has
raised costs relative to what would occur in a legal
cost, but by far less than asserted in many accounts
• Miron (2003) estimates that cocaine is currently 2-4
times, and heroin 6-19 times, its price in a legal market
• Prior research has suggested that cocaine is 10 to 40
times and heroin hundreds of times, its legal price
• MacCoun and Reuter (1997) note that the price of
marijuana in the Netherlands which has de facto
legalized marijuana, is little different from the price in
the USA
10
Price and quantity of drugs under
prohibition: evidence
• So, theory implies that prohibition
reduces drug consumption but also
suggests that this reduction is potentially
modest
• Evidence on this issue is incomplete due
to lack of good data but existing research
suggests some broad conclusions
11
Price and quantity of drugs
under prohibition: evidence
• The amount of drug use that occurs under
prohibition suggests by itself that
prohibition’s impact on drug consumption
is moderate
14
Price and quantity of drugs
under prohibition: evidence
• Over the past 25 years, enforcement of
drug prohibition has expanded
dramatically
– e.g. the real, per capita budget of the Drug
Enforcement Administration (DEA) has
increased by a factor of more than three and
the drug arrest rate has increased by a factor
of roughly two
– Over the same period, however, heavy drug
consumption has increased and the real
purity-adjusted prices of cocaine and heroin
in the US have more than halved
2002
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Real DEA Budget (1999 US$) Per 1000 Population
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1
0
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Total Drug Arrests Per 1000 Population
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Real DEA Budget and Total Drug Arrests
Per 1000 Population in USA (1975-2002)
Real DEA Budget
Arrests
2000
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Cocaine
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1999 $ (Cocaine)
800
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Heroin
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0
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1999 $ (Heroin)
16 Median Prices Per Pure Gram of
Cocaine and Heroin in USA (1974-2000)
7000
6000
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5000
500
17
Price and quantity of drugs
under prohibition: evidence
• This evidence does not prove that
increased enforcement had no effect;
prices might otherwise have fallen
further and drug consumption increased
• But absent an explanation for why this
should have occurred, this evidence
constitutes a puzzle for the view that
enforcement reduces consumption and
increases price
18
Drugs, prohibition, and crime
• The impact of prohibition on crime
– Participants in illicit markets cannot
resolve disputes via standard, non-violent
mechanisms
– Existing evidence shows that the net effect
of prohibition is to increase violence
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Murder rate per 100,000 population
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Murder Rate in USA Per 100 000
Population (1900-2001)
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0
20
Drugs, prohibition, and crime
– The murder rate rose rapidly after 1910, when many
states adopted drug and alcohol prohibition laws
– The rate also rose through World War One, when
alcohol and drugs were first prohibited nationally,
and it continued to rise during the 1920s as efforts
to enforce alcohol prohibition increased
– The rate then fell dramatically after alcohol’s repeal
in 1934 and (except for wartime) remained at
modest levels for several decades
– In the late 1960s, the rate increased dramatically
again and stayed at historically high levels through
the 1970s and 1980s, coinciding with a drastic
increase in drug law enforcement
21
Drugs, prohibition, and crime
• The impact of prohibition on crime
– Comparisons across cities and countries
also indicate a positive relationship
between prohibition enforcement and
violence
– These results must be interpreted with
caution because they document
correlations that might not be causal
22
Drugs, prohibition, and crime
• The impact of prohibition on crime
– Micro evidence suggests even more clearly
that prohibition increases violence
– Goldstein et al. (1989, 1997) find in a
sample of New York City precincts during
1988 that almost three-quarters of ‘drugrelated’ homicides were due to disputes over
drug territory, drug debts and other drugrelated issues rather than to the psychopharmacological effects of drugs
23
Drugs, prohibition, and crime
• The impact of prohibition on crime
– A body of evidence suggests that violence is
commonly used in a range of prohibited activities,
independent of the characteristics of the good
– Violence committed by pimps or johns against
prostitutes is well-documented
– Violence was an important feature of the gambling
industry during its early years in the USA when
entry was limited; the incidence has decreased as
legal gambling has mushroomed
– Violence is commonly used to resolve disputes in
countries like Russia where the official dispute
resolution system is ineffective
24
Drugs, prohibition, and crime
• The effect of drug use on crime
– There is little evidence of a causal role for drug use
in relation to crime
– To the extent that it exists, it is stronger for alcohol
– The evidence usually offered as showing an effect
of drug use on crime does not stand up to careful
scrutiny
– This evidence consists of statistics that document a
high frequency of drug use among arrestees
– This suggests that many criminals use drugs but it
does not demonstrate that drug use causes criminal
behavior
25
Drugs, prohibition, and crime
• The effect of drug use on crime
– The correlation between drug use and crime is
contaminated by the fact that many arrests are for
possession; the sense in which this shows that drug
use ‘causes’ crime is purely tautological
– These data provide no evidence that drug users
were under the influence of drugs when they
committed their crimes or any evidence that the
influence was to make the user criminogenic
– The set of arrestees is not a random sample of the
population
– Data on the behavior of arrestees do not indicate
how many people consumed drugs without
engaging in criminal behavior and thus say nothing
about the tendency of drug use to cause such
behavior
26
Drugs, prohibition, and the
welfare of drug users
• Prohibition reduces quality control in the
market for drugs
• Prohibition harms drug users by raising
drug prices
• An indirect effect of this is to encourage
users to employ risky consumption
methods that give the ‘biggest bang for
the buck’
• Prohibition discourages medical use of
drugs
27
Drugs, prohibition, and the
welfare of drug users
• Addiction revisited
– Drugs are far less addictive than commonly
portrayed
– Continued use rates for alcohol and tobacco are
even higher than those for illicit drugs, and casual
observation suggests continued use rates for other
legal goods are higher still (e.g. chocolate, caffeine)
– Stereotypical depictions of addiction suggest that
experimentation progresses inevitably into regular
use and that irregular use occurs rarely
– In fact, a sizeable percentage of heroin users
consume only occasionally (Zinberg, 1979) and
measurable withdrawal symptoms from opiods
rarely occur until after several weeks of regular
administration (Jaffee, 1991)
28
Drugs, prohibition, and the
welfare of drug users
• Health consequences
– The negative health consequences of drug use are often
overstated
– The Merck Manual, a standard reference book on diagnosis and
treatment of diseases states that, ‘people who have developed
tolerance [to heroin] may show few signs of drug use and
function normally in their usual activities…Many but not all
complications of heroin addiction are related to unsanitary
administration of the drug’
– It also writes that, ‘there is still little evidence of biologic
damage [from marijuana) even among relatively heavy users’
– Concerning cocaine, the manual does not mention effects of
long-term use but emphasizes that all effects, including those
that promote aggression, are short-lived
– Many of the health risks discussed for all drugs result from
overdoses or adulterated doses, not moderate or even heavy
levels of use
29
Drugs, prohibition, and the
welfare of drug users
• Health consequences
– Problem with standard depictions of health
consequences of drug use is that they rely upon data
sources that are biased towards those suffer the
worst consequences from drug use (data from
clients of drug treatment programs)
– Even a robust correlation between drug use and
poor health does not indicate the effect of drug use
on health, since drug use is often associated with a
range of behaviors and characteristics that might be
detrimental to health
30
Drug Use and Labor Market
Outcomes
• According to the conventional view,
drug use inhibits concentration, coordination, motivation, and other
factors that contribute to successful job
market experience
• widely-cited estimates of drug abuse
suggest that drug use reduces
productivity in the US by tens of
billions of dollars each year (Harwood,
Fountain, and Livermore, 1998)
31
Drug Use and Labor Market
Outcomes
• In fact, the existing evidence on relationship
between drug use and labor market outcomes
faces severe methodological difficulties
– These studies use data on the wages and drug use of
individuals, along with ancillary information on
demographic and economic characteristics such as
age, education, or experience
– The basic analysis regresses wages on drug use plus
measured individual characteristics
– The problem is that drug use and wages are both
plausibly correlated with unmeasured characteristics
such as optimism, motivation, sociability, creativity
or risk aversion
– So, a finding that drug use and wages are correlated
can reflect the influence of these omitted individual
characteristics
32
Drug Use and Labor Market
Outcomes
• The results of existing studies of drug use and
wages are therefore difficult to interpret at best
– Further, the results do not support the conclusion
that drug use is associated with lower wages
• A persistent puzzle in this literature is that the estimated
relation between drug use and wages is often positive!
– The estimated relation between drug use and certain
other labor market outcomes such as employment
status or hours worked, is more frequently negative,
but even for these outcomes there are many
‘paradoxical’ results in the literature
– Given the methodological problems, the right
conclusion is that there is no evidence in either
direction
33
Concluding Thoughts
• In summary, the libertarian economist
emphasizes that the unusual characteristics of
illicit drugs markets result from the legal
status of drugs rather than from the
characteristics of drugs themselves
• A normative analysis of prohibition must
distinguish between the effects of prohibition
and the effects of drugs themselves
• An obvious question raised by the libertarian
economist’s analysis is whether prohibition is
the best policy towards illicit drugs