Transcript The Incidence Of Drug Use In U.S.

Introduction
to Economics:
Social Issues
and Economic
Thinking
Wendy A .
Stock
CHAPTER 15
THE ECONOMICS OF ILLEGAL
DRUGS
Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: Daniel Grill/GettyImages, Inc.
PowerPoint
Prepared by
Z. Pan
AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
Describe the
incidence of drug use
Model the
externalities
associated with drug
use
Describe the
incomplete
information problem
associated with drug
use
Copyright © 2013 John Wiley & Sons, Inc.
Appraise the policy
responses to drug
use
Analyze supply and
demand issues in
regulation policy
Analyze the impacts
of drug legalization
2
“WAR ON DRUGS”
War on Drugs began in the 1970s
Against heroin, cocaine, crack, marijuana,
methamphetamine, etc.
Federal funding for drug control programs
$15.5 billion annually
2 million Americans are arrested for drugrelated offenses each year
Copyright © 2013 John Wiley & Sons, Inc.
3
THE INCIDENCE OF DRUG USE IN U.S.
Copyright © 2013 John Wiley & Sons, Inc.
4
THE MARKET FOR DRUGS
Copyright © 2013 John Wiley & Sons, Inc.
5
MARKET FAILURE: EXTERNALITIES
Externalities occur when some of the costs
or benefits of a trade are imposed on people
outside the trade.
Negative externalities are costs that are
imposed on third parties.
Positive externalities are benefits that are
imposed on third parties.
Copyright © 2013 John Wiley & Sons, Inc.
6
PRIVATE VS. SOCIAL MARGINAL COSTS
Private marginal costs are marginal costs
that accrue only to the producers of a good
or service.
Social marginal costs are marginal costs
that accrue to society as a whole.
 MC social = MC private + Negative Externality
Copyright © 2013 John Wiley & Sons, Inc.
7
NEGATIVE EXTERNALIT Y IN DRUG MARKET
Copyright © 2013 John Wiley & Sons, Inc.
8
MARKET FAILURE: IMPERFECT INFORMATION

Imperfect information occurs when
demanders or suppliers do not know the true
costs and benefits associated with a good or
service.
 e.g. cigarette industry
Copyright © 2013 John Wiley & Sons, Inc.
9
FIGHTING DRUGS: DEMAND-SIDE POLICIES
Laws that illegalize drug use
Prevention and treatment programs
1970s - methadone clinics
1980s –
 “Just Say No” campaign
D.A.R.E. program
Montana Meth Project (MMP)
Copyright © 2013 John Wiley & Sons, Inc.
10
IMPACT OF DEMAND-SIDE POLICIES
Copyright © 2013 John Wiley & Sons, Inc.
11
FIGHTING DRUGS: SUPPLY-SIDE POLICIES
Interdiction (disrupting transport of drugs),
2.5 billion dollars per year
Destroying drug production facilities,
eradicating crops
Pressuring foreign governments to help
reduce exports of drugs to U.S.
Copyright © 2013 John Wiley & Sons, Inc.
12
IMPACT OF SUPPLY-SIDE POLICIES
Copyright © 2013 John Wiley & Sons, Inc.
13
IMPORTANCE OF ELASTICIT Y OF DEMAND
 When the demand for drugs is relatively elastic, supply side policies cause the quantity of drugs used to fall
dramatically from Q to Q'.
Copyright © 2013 John Wiley & Sons, Inc.
14
IMPORTANCE OF ELASTICIT Y OF DEMAND
 When the demand for drugs is relatively inelastic, supply side policies do not generate very large reductions in drug
use, but do cause large increases in drug prices.
Copyright © 2013 John Wiley & Sons, Inc.
15
POLICY IMPLICATIONS OF ELASTICIT Y
Elastic Demand
 Marijuana
 Methamphetamine
Inelastic Demand
 Heroin
 Cocaine
Results of Supply -side policies
 large reductions in quantity and small increases in price
for marijuana
 large increases in price but only small reductions in
quantity traded for heroin, cocaine
Copyright © 2013 John Wiley & Sons, Inc.
16
ECONOMICS OF LEGALIZATION
Personal Use of Marijuana by Responsible Adults
Act in 2009
16 states allow for legal use of marijuana for
medical purposes
Impacts on Children?
Gateway to more dangerous drugs?
Historical experiences in legalizing illegal
goods/services
 Abortion (Roe v. Wade in 1973)
 Alcohol (Prohibition period 1920-1933)
Copyright © 2013 John Wiley & Sons, Inc.
17
FACTORS AFFECTING DEMAND & SUPPLY
Higher Demand due to:
Costs of using it (fines and imprisonment)
fall
Higher Supply due to:
Risk of fines and imprisonment for
producers falls
Production and transportation costs fall
Better production technology
Safer drug under regulation?
Copyright © 2013 John Wiley & Sons, Inc.
18
POTENTIAL IMPACTS OF LEGALIZATION
What would happen to the price of marijuana?
Copyright © 2013 John Wiley & Sons, Inc.
19
ADDRESSING NEGATIVE EXTERNALITIES
Taxing drugs like pollution
Copyright © 2013 John Wiley & Sons, Inc.
20
QUESTIONS/DISCUSSIONS
1. In 2011, 16 states had enacted
laws legalizing medical
marijuana. How would the
legalization of medical
marijuana affect the market for
illegal marijuana?
2. Would legalizing drugs reduce
crime? Why or why not?
Copyright © 2013 John Wiley & Sons, Inc.
21
KEY CONCEPTS
•
•
•
•
•
Negative externalities
Positive externalities
Private marginal costs
Social marginal costs
Imperfect information
Copyright © 2013 John Wiley & Sons, Inc.
22