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Alia W
Economics as a Social Science
Dennis Wilson
April 30, 2014
Illegal Drugs in the Underground Economy
The underground market for drugs is like any other market economy. Like all other
markets, it is governed by the forces of supply and demand. When speaking about these
concepts, it is valuable to have a concrete definition to return to. Supply, as defined in
Essentials of Economics is The ability and willingness to sell (produce) specific quantities of
a good at alternative prices in a given time period, ceteris paribus. (Schiller, 50). Similarly,
demand is The ability and willingness to buy specific quantities of a good at alternative prices
in a given time period, ceteris paribus. (Schiller, 50).
Regrettably, the demand for drugs is considered to be relatively inelastic (at least in the
short term). As a result, an increase in prices, generally speaking, may not lead to a substantial
decrease in the quantity of drugs demanded. In essence, addicts will buy no matter the price.
Factors that affect demand may include income level, the time frame (i.e. spring break or New
Years Eve), and the availability of other substitute goods.
In illegal drugs, as with most other goods, there are substitute goods available. When the
price is high, consumers who are either unwilling or unable to pay, turn to other goods that are
less expensive. Consumers will also shift to other goods if the product becomes too difficult to
obtain. One of the most common substitutes for illegal drugs happens to be prescription drugs.
Oxycodone, or Oxycotin is the main prescription drug used as a substitute for heroin since it is a
powerful opioid, both are a derivative of poppies. At the same time, alcohol and cigarettes both
function as substitutes, both are habit forming and addictive. There has been some thought to the

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idea that restrictive or prohibitive policies increase the consumption of substitute goods, such as
alcohol, which then generate their own negative externalities. Externalities are costs that third
parties bear. The negative effect of alcohol is widely acknowledged, reduced inhibitions leading
to drunk driving and abuse as well as other negative externalities.
Supply of drugs is relatively elastic and an escalation in price will usually cause a large
increase in the quantity of narcotics supplied. Several of the factors that affect supply include;
government restrictions, seasonal and weather conditions, and the price and availability of
factors of production.
With attention to supply and demand, government has two principal courses of action.
Harm reduction (through education and information) or fixed, restrictive policies such as custom
controls, and tough or extreme sentencing such as Thailand (who imposes capital punishment for
the traffic of narcotics). Or, yet more policies imposing on freedoms such as no-knock police
raids, incarceration, and confiscation of private property. Police has been known to resort to a
form of setup and blackmail to gain informants, as neither users, nor dealers consider themselves
victims.
All things considered, the key difference between the two approaches is that harm
reduction goes after the demand side of the market, while heavy, restrictive policies are targeted
towards the supply of illegal drugs. Admittedly, most legislation contains a mix of both
approaches, but the focus remains on the supply, and prohibition is the main budgetary element
aimed at reducing drug use. Funds directed to drug education tend to be, for the most part,
lackluster. Subsequently, it funds misinformation, and promotes fear driven propaganda, not
relieving public ignorance or hysteria over the effects of drugs.

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Restrictive, or prohibitive policies aim is towards supply-reduction; reduction of the


supply of drugs provided by dealers, importers, and manufacturers. This is achieved by the police
force, acting as an instrument of government against drug production. Their aim is to arrest as
many individuals as is conceivable. This is their attempt to reduce supply in order to decrease the
equilibrium quantity of the drugs bought and sold on the market. This policy requires maximum
spending, and results in minimal returns. It is also ineffective, as its objective is to halt the
exchange between willing buyers and sellers, which is both costly and ineffective. Consumers
seek alternative, or substitute means of satisfying their wants, that are both risky and expensive.
Banning a product simply drives the market underground, prices are higher than they otherwise
would, and quality and diversity as well as quantity decreases. Attempting to halt the market
process, that exchange between willing buyers and sellers is practically impossible. Lucrative
profits in the illegal drug industry brings more individuals into the trade. When government
agencies and law enforcement eliminate small time sellers and suppliers, they are maintaining
the monopolies of the cartels. Supply is reduced, and prices go up, leading to increased income
for the remaining suppliers. In this scenario, both production and supply are constrained. Large
producers and sellers have a monopoly of sale. They create their own barriers of entry to exclude
competition, often by violent measures.
One of the main arguments for a prohibitive drug policy is to reduce negative or violent
externalities from drug users. When in reality, most of those are externalities from prohibition
itself. Prohibition increases violence because drug market participants cannot resolve disputes
with courts and lawyers; so, they use violence instead. They have no access to the legal and
judicial system as victims of theft or assault because they are already viewed as criminals. As
such, the marginal cost of violence is lower since they are already evading apprehension for

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illegal activities such as possession or distribution. They have a need to protect themselves and
their (illegal) property. Prohibition raises drug prices, which implies more theft, robbery, other
income- generating crime. If an addict cannot afford his fix, he will seek out a way to get it, most
likely through criminal means such as robbery. This behavior is referred to as economic
compulsive, killing while stealing to pay for a drug habit. Restrictive policies also divert police
effort from deterrence of non-drug related crime. Much of drug related violence is systemic,
dealers and producers battling over drug territory. Since there are no natural barriers to entry in
the drug trade, violence is the most common measure to keep competitors out.
When the demand for drugs is inelastic, a decrease in supply will cause an increase in the
market price for a drug, but only slightly reduce the quantity bought and sold. A prohibitive,
restrictive policy can never make a real dent in the supply. Simply put, buyers will demand
drugs, even at higher prices. Restrictive policies cannot keep pace with the supply provided by
dealers, and has negligible effect on a users demand.
Higher prices result in more crime, policies that aim to restrict what is considered a crime
(dealing and possession of narcotics) have resulted in worse types of crime being committed
the type that impacts negatively on a third party; by attempting to reduce crime by strict
trafficking laws, increasing busts and greater use of resources on a War on Drugs. The effect is
more serious crimes such as armed robbery. It also calls to attention the claim that prohibitive
policies have reduced the quantity demanded of soft drugs such as marijuana and hash. While
this appears to be true, such policies may have actually increased the demand for harder drugs
such as cocaine and heroin. Highly regulated markets also tend to produce concentrated forms of
the drug. In order to minimize the risk of detection per amount of narcotic delivered, suppliers
make drugs as small and light as possible. This means higher potency. Thus, illegal drugs

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become more potent the more law enforcement attempts to crack down on them. Economist
Mark Thornton found that increased federal expenditures on interdiction explains 93 percent of
the increase in marijuanas potency. (Thornton, 170)
As previously mentioned, suppliers of narcotics endure fixed costs of evading law
enforcement, this reduces the difference in price that high and low potency drugs that would
normally exist. As a result, dealers want to sell higher-potency drugs to increase their profits.
This also encourages users to demand the more potent drugs because the price relative to the
potency is not so different.
An increase in the potency of illegal narcotics over the years has shown some troubling
effects. In 2010 alone, over 38,000 people in the U.S. died from a drug overdose. (Drug) And accumulatively, from 1971 to 2007, the rate of death from a drug overdose per 100,000 total deaths
increased by a factor of ten. (Boettke) The consumption of drug users has become more
dangerous due to the fact that their purchases have become more potent and less predictable. The
potential to overdose, or reception of an adulterated dose represents are a large portion of the
risks associated with the consumption of illegal drugs. Product quality is not a concern of
suppliers or manufacturers, they are producing and selling a prohibited product. The buyer
cannot complain, neither can he seek recourse from the law for damages to his person from
consumption of an adulterated or poisoned substance. A consumer of illegal goods is always at
the mercy of the supplier.
Accordingly, there is the increased costs passed on to the health care system. Users who
did not perish from an overdose, likely receive medical subsidies from the government; since
they are likely using the greater portion of their disposable income to pay for their drug habit.
Miron and Zwiebel maintain that:

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It is also possible that prohibition increases rather than decreases the use of publicly funded
health care resources. Prohibition raises the frequency of accidental poisonings and overdoses,
contributes to the spread of HIV and increases emergency-room treatment of gunshot wounds.

In addition to users receiving emergency room treatment for overdoses, Miron and Zwiebel also
support that many of the complications of addiction are related to unsanitary administration of
the drug. Additionally, prohibition has discouraged the potential use of illegal drugs for
medicinal use. In one case, it is the use of cannabis oil to treat seizures in epileptic children.
Subsequently, the case for a harm reduction policy must be made to address the failures
of a supply side method. Harm reduction is aimed at decreasing the demand for narcotics through
education and self-control. The policy instrument of proper information and education regarding
drugs will allow individuals to make informed, rational decisions about drug consumption. It
functions in a manner that allows a decrease in the demand for drugs, and thus traded in the
marketplace.
Policy choices must balance the costs and benefits of implementation. It must be
consistent in its application. Prohibitive systems have failed in this regard, they are rife with
inconsistencies even in what constitutes an illegal drug. Is there really that much difference
between marijuana and cigarettes? Or alcohol? All of them have been proven to be addictive
with consistent use, and all produce some negative externalizations. Prohibition results in only
moderately reduced levels of drug consumption. Simply put, high costs and numerous negative
externalities outweigh the small benefits that restrictive policies produce. With this in mind, the
natural conclusion is that a restrictive, prohibitionist policy is a poor means to the objective of
reducing drug use. After all, economics is the study of how best to allocate scarce resources
among competing uses.

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Works Cited
Boettke, Peter, Christopher Coyne, and Abigail Hall. "Keep Off the Grass: The Economics of
Prohibition and U.S. Drug Policy." Oregon Law Review 91.1079 (2013): n. pag. Web.
"Drug War Statistics." Drug Policy Alliance. N.p., n.d. Web. 30 Mar. 2014.
Miron, Jefftey A., and Jeffrey Zweibel. "The Economic Case against Drug Prohibition." Journal
of Economic Perspectives 9 (1995): 175-92. American Economic Association. Web. 130
Apr. 2014. <http://www.aeaweb.org/articles.php?doi=10.1257/jep.9.4.175>.
Schiller, Bradley R. Essentials of Economics. 9th ed. New York: McGraw-Hill, 1993. 50. Print.
Thornton, Mark. The Economics of Prohibition. Salt Lake City: U of Utah, 1991. Print.

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