Economic Theory of Illegal Goods: The Case of Drugs

• NCJ Number: 215820
• Author(s): Gary S. Becker; Kevin M. Murphy; Michael Grossman
• Date Published: December 2004
• Length: 37 pages
• Grant Number(s): 045566
• Sponsoring Agency: Robert Wood Johnson Foundation; National Opinion Research Center (NORC); Hoover Institution on Drugs; George J. Stigler Ctr for the Study of the Economy & the State
• Sale Source: National Bureau of Economic Research (NBER)
• Publication Format: Document (Online)
• Publication Type: Legislation/Policy Analysis
• Language: English
• Country: United States of America
• Note: Downloaded October 3, 2006.

Annotation

Using the supply and demand for illegal drugs as a case example, this study analyzed the positive and normative effects of punishments that enforce laws to make the production and consumptions of certain goods illegal.

Abstract

Overall, the economic analysis of illegal drugs indicates that legalizing drug use and taxing its consumption would be more effective at reducing drug use than continuing to prohibit the legal use of drugs through legislation. The analysis illustrates how the elasticity of demand for an illegal good is important to understanding the effects of punishment to producers on the overall cost of supplying and consuming the illegal good. This analysis takes into consideration the expenditures added by illegal suppliers to avoid detection and punishment as well as the optimal public expenditures to apprehend and convict illegal suppliers. The authors illustrate how when the demand for illegal goods is inelastic, enforcing prohibition is ineffective at reducing use and raising prices. On the other hand, comparisons of goods output and prices when a good is legal and taxed with the outputs and prices when a good is illegal shows that a monetary tax on a legal good could cause greater reduction in output and increase in prices than would optimal enforcement if the good were illegal. The authors also consider the addictive component of drugs as well as the effects of peer pressure to help explain why the demand elasticities for some drugs may be relatively high. Campaigns against the use of illegal drugs, such as the “Just Say No” campaign, are analyzed and considered effective against illegal goods that involve enforcement expenditures. Such campaigns, however, are ineffective when the consumption of legal goods is discouraged through monetary taxes. Given that this economic analysis illustrates the greater effectiveness of monetary taxes on drugs to reduce their use, the fact that drugs and many other goods remain illegal is explained through an analysis of the greater political clout of the middle classes. Figure, footnotes, references