Transcript Chapter 17

Chapter 17
Tobacco, Alcohol, Drugs, and
Prostitution
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter Outline
• AN ECONOMIC MODEL OF MARKET
FOR TOBACCO AND ALCOHOL
DRUGS AND PROSTITUTION
• ARGUMENTS FOR MAKING A GOOD
ILLEGAL
• DECRIMINALIZING DRUGS AND
PROSTITUTION
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Consumer and Producer Surplus Analysis
P
• Value to the Consumer:
• 0ACQ*
• Consumers Pay Producers:
• OP*CQ*
• The Variable Cost to Producers:
• OBCQ*
• Consumer Surplus:
Demand
• P*AC
Q/t
• Producer Surplus:
• BP*C
Supply
A
P*
C
B
0
Q*
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Arguments for Making a Good Illegal
• People have limited information about the
good, are not capable of making a good
decision about the good or the good is
addictive and one-time users can not learn
from their mistake.
• There are externalities, effects of a
transaction that hurt or help people who are
not a part of that transaction, involved in the
production or consumption of the good.
• The good is immoral.
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Preventing Bad Decisions
• Economists are typically reluctant to
assume that people can not make good
decisions.
• Drugs tend to be an exception to this
rule because they are addictive.
• Ads appeal to children
– Whaaazzuupp (how ya doin)
– Joe Camel
– NASCAR Winston Cup, Busch Series
– Virginia Slims Tennis
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Modeling Externalities
Social Cost
External Cost
SMarginal Cost
P
P’
P*
D(Marginal Benefit)
0
McGraw-Hill/Irwin
Q’ Q*
The Offending Good
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Examining the Externalities
• Tobacco accounts for approximately $1 per
pack in costs incurred by taxpayers and
nonsmokers.
– Medicare, Medicaid, Asthma,
• Drunk Driving accounts for one-third of the
37,000 traffic accidents that cause 42,000
deaths
• 28% of all violent crimes (44% for rapes) are
committed while the perpetrator is on drugs.
• 55% of inmates in jail, detention, or prison
used drugs during the month leading up to
their arrest.
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Battling Negative Externalities While
Creating Others
• Much of the drug violence that exists,
only exists because of laws
criminalizing drug use.
• If cocaine, methamphetamine, and
marijuana were legal and inexpensive,
– there would be less of a need for addicts to
rob in order to get money to buy them.
– there would be no drive-by shootings to
protect turf.
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© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
A Twist on the Externalities Argument for
Tobacco
• Cigarette smokers are more likely to die
– at an earlier age than they would have otherwise
died.
– in a less costly manner than they would have
otherwise died. (e.g. heart attack rather than
Alzheimer’s.)
• Some economists estimate that this effect saves
Social Security, Medicare and Medicaid
(because they are not in nursing homes) more
money than the $1 per pack in estimated
external costs.
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Using Taxes to Correct for Externalities
Social Cost=S+tax
External Cost=tax
SMarginal Cost
P
P’
P*
D(Marginal Benefit)
0
McGraw-Hill/Irwin
Q’ Q*
Tobacco/Alcohol
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Tobacco Settlement
and why Elasticity Matters
• 1998 settlement between several states
and several tobacco companies
• $250 billion spread over 20 years
• Demand for tobacco products is fairly
inelastic. This means that the percentage
change in prices will be more than the
percentage reduction in smoking.
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A Tax on Tobacco with Inelastic Demand
S+tax
tax
SMarginal Cost
P
P’
P*
D(Marginal Benefit)
0
McGraw-Hill/Irwin
Q’ Q*
Tobacco/Alcohol
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Elasticity Estimates
• Elasticity of Demand
– for Tobacco
• -.2 for adults
• -.5 for children
– For Beer
• -.53
• Implications
– A dollar increase in the tax on cigarettes would
reduce consumption by adults by 10% and reduce
consumption by children by 25%.
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The Importance of Elasticity for Drugs
• If people are addicted to a particular drug,
their demand for it will be inelastic.
• Drug interdiction efforts shift the supply curve
to the left.
• This will cause prices to rise
– Addicts will not reduce quantity demanded much
– Recreational users will reduce quantity demanded
more
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The Impact of Decriminalizing Drugs or Prostitution
P
Sillegal
Slegal
Pillegal
Plegal
Dlegal
Dillegal
Qillegal
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Qlegal
Q
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Legalization with Taxes
• Applying Figure 17.5 to drugs, legalization
could deal with the external costs.
• Making the tax too high would induce a
black market.
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