Transcript Chapter 17

Chapter 20
The Line Between Legal and
Illegal Goods
McGraw-Hill/Irwin
Copyright © 2010 by 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
20-2
You Are Here
20-3
Consumer and
Producer Surplus Analysis
P
A
P*
C
B
0
Q*
• Value to the Consumer:
• 0ACQ*
Supply
• Consumers Pay Producers:
• OP*CQ*
• The Variable Cost to Producers:
• OBCQ*
• Consumer Surplus:
• P*AC
Demand
• Producer Surplus:
Q/t
• BP*C
20-4
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.
20-5
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
– Joe Camel
20-6
Modeling Externalities
Social Cost
External Cost
SMarginal Cost
P
P’
P*
D(Marginal Benefit)
0
Q’ Q*
The Offending Good
20-7
Examining the Externalities
• Tobacco accounts for approximately $1 per pack
in costs incurred by taxpayers and nonsmokers.
– Medicare, Medicaid, Asthma,
• Drunk Driving accounts for 32% of the 37,000
traffic accidents that cause 41,059 deaths
• 27% of all violent crimes (43% for rapes) are
committed while the perpetrator is on drugs.
• 36% of inmates in jail, detention, or prison used
drugs during the month leading up to their
arrest.
20-8
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.
20-9
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.
20-10
Using Taxes to Correct for
Externalities
Social Cost=S+tax
External Cost=tax
SMarginal Cost
P
P’
P*
D(Marginal Benefit)
0
Q’ Q*
Tobacco/Alcohol
20-11
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
Q’ Q*
Tobacco/Alcohol
20-13
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%.
20-14
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
Qlegal
Q
20-16
Legalization with Taxes
• Applying Figure 16.5 to drugs,
legalization could deal with the
external costs.
• Making the tax too high would induce
a black market.
20-17