Illicit Drugs Price Elasticity of Demand and Supply by nikeborome

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									Illicit Drugs: Price Elasticity of
Demand and
 By: William Rhodes ; Patrick Johnston ;
 Song Han ; Quentin McMullen ; Lynne Hozik
 January 10, 2002
       The main focus of this study:

The 1998 National Drug Control Strategy
  established an ambitious national agenda
  for reducing illicit drug use by 25 percent
  as of 2002 and by 50 percent as of 2007.
   How can supply-based programs, which
    restrict drug availability, consequently
    increase drug prices, and reduce the
    initiation and continuation of drug abuse
    in the United States?
It is clear that because of the interdiction and
   domestic lows, the prices of illicit drugs is much
   higher than what would otherwise prevail.
Cocaine, heroin and marijuana are basically
   agricultural products that quire minimal
   inexpensive chemical processing. If it were not
   for law enforcement, they might sell for prices
   that are comparable to aspirin. Instead, users
   pay many times the price of aspirin for typical

           Prices of
 DRUGS    Marijuana,

  War on drugs: Demand and Supply
  Based Programs
Nearly fifteen years ago, governments realized the need for
  policies to control the use of illicit drugs in nations, this aim
  brought up what was inaugurated as a war on drugs.

Supply based programs should reduce the availability of
  drugs to consumers, either by preventing drugs from entering
  the country, or by increasing the cost of their production and
  distribution, or both. The success of supply-based programs
  should increase the price of illicit drugs, and if drug users act
  anything like the consumers of licit products(aspirin), some
  should quit and others should reduce their use.
Demand-based programs should reinforce this effect by
  preventing people from becoming drug users in the first
  place, and by encouraging and facilitating active users to
Did this policies really work in
   If the Nation is successful at reducing drug
    supply and hence increasing drug prices,
    the question becomes:
     How will increased prices affect the
         demand for illicit substances?
Elasticity of Demand
   Marijuana

In the early 1980s. marijuana prices were relatively low, and foreign
supplies seemed readily available. But interdiction programs have been
more successful with marijuana. Heroin has no odor, but
marijuana smells and is easily detected. Thus, interdiction was
successful at intercepting marijuana, with the consequence that
marijuana prices increased.
Higher marijuana prices seemed to have attracted increased domestic
production, including indoor and hydroponic production, which would
have been cost-prohibitive without price increases and relief
from foreign competition. Marijuana prices peaked at all distribution
levels sometime around 1992.
Since then, as domestic production has grown, prices have fallen.
Results from other studies
 Saffer and Chaloupka (1995):
heroin’s price elasticity is about
-1.80 to -1.60
cocaine’s is about -1.10 to -0.72
 According to Becker and Murphy (1988),
drug consumption is negatively correlated with past,
  current, and future prices;
 current drug consumption is positively correlated
  with past and future consumption;
and that the long-run price elasticity is greater than
  the short-run elasticity.
price elasticity of demand for other addictive
      goods such as alcohol and cigarette

 Chaloupka (1991) found a short-run price
  elasticity of demand for cigarettes at -0.20
  and longrun elasticity at -0.45.
 Chaloupka, and Sirtalan (1998) estimated
  that the long-run price elasticity of demand
  for alcohol ranges from -0.26 to -1.26, and
  the short-run price elasticity ranges from -
  0.18 and -0.86.
        Demand & Supply model
   A demand curve is a function that relates the amount of a
    good - such as cocaine - that consumers are willing to buy
    at various prices.
   A supply curve is a separate function that relates the
    amount of a
   good - cocaine again - that suppliers are willing to provide
    at different prices.
   An equilibrium is established at the unique price at which
    the amount that consumers want is the amount that
    suppliers are willing to sell.
   If the price were too low, then buyers would want more
    than suppliers would be willing to supply. Those consumers
    who were willing to pay more would bid the price upward.
   If the price were too high, then buyers would want less
    than the suppliers offered. To get rid of their stock,supplier
    would lower their price.
the supply of cocaine is highly
the supply of cocaine is highly elastic. This means that suppliers
   will provide about as much cocaine at a set price as consumers
   are willing to buy at that price.
 Cocaine is inexpensive to produce. It is basically an agricultural
   product that requires minimal inexpensive chemical processing.
 The product is fairly easy to transport, and only about 300 metric
   tons satisfies the entire U.S. domestic market.
 the largest cost involved in transporting cocaine is for the risk of
   transporting and distributing it. Some of these risks are imposed
   by the industry itself, which has to rely on violence in the absence
   of legitimate contracting vehicles.
 Other risks result from interdiction and law enforcement, activities
   that force dealers to contend with substantial prison terms and
   loss of assets when caught.
 Over the long run: suppliers can increase the amount of cocaine
   without substantially changing the above costs, so the supply
   curve seems quite elastic.
Elasticity of Demand

   Marijuana
   During the early 1980’s( the age of “sex, drugs &
    Rock& Role”), when the price of marijuana was
    relatively inexpensive, young Americans have
    been more likely to experiment with marijuana.
   When marijuana has been relatively unavailable,
    as reflected in high marijuana prices during the
    late 1980s and early 1990s, young Americans
    have been less likely to experiment with
   Marijuana prices have fallen toward the end of
    the 199Os, youth have increasingly returned to
    marijuana use.
So, do people respond to change in
price of marijuana? YES!
   There seems to be strong evidence that price and
    availability influence the decisions of children and
    young adults to experiment with marijuana.
   It is also true that adults are sensitive to the
    price of marijuana. The higher the price, the
    smaller the number of people who use marijuana
    at both weekly and occasional levels. This is true
    for members of households, who tend to use on
    an occasional basis, as well as for arrestees, who
    often use at a weekly level or higher.
   So, nations, by policies                                                                                    po
    towards war on drugs                                                                            dr
                                                                                                      u   gs
    (supply based programs)                                                                 o   n

    can in fact decrease the                                                         w
    drug consumption.                                                         th
                                                                        ith                                                           rd
   by the introduction of                                      s
                                                                                                                             i   n te
    technological advances,                              dr
                                                                                                                    t th
    such as improved ways of                    y
                                                                                                            o   u
    detecting cocaine, and               p   pl                                                     w
                                    Su                                                     s
    improved means of                                                                 dr
                                                                                        ug                  D
    detecting domestic                                                       y
                                                                                 of                                   an
    marijuana cultivation                                       Su
                                                                   p                                                                 fo
                                                                                                                                        r   dr
    supply-based programs                                                                                                                     ug
    can be the major means by
    which the Nation reaches
    its 2002 and 2007 targets.                                                                                                                      Quantity of drugs

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