more slides from ed dolan’s econ blog econ 101, hayek, and why we are losing the war against...

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Econ 101, Hayek, and Why We are Losing the War

against DrugsPosted March 30, 2011

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Posted March 30, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

The Drug Wars Spread

After shaking the economic and political structures of Mexico and Columbia, the drug wars are moving to Central America

Where to look for clues to why the United States is losing its endless war on drugs Econ 101 and demand elasticity The writings of Friedrich Hayek

Photo sources: http://upload.wikimedia.org/wikipedia/commons/6/67/Cocaine3.jpg;http://commons.wikimedia.org/wiki/File:Topographic_map_of_Central_America.jpg


http://upload.wikimedia.org/wikipedia/commons/6/67/Cocaine3.jpg


Elasticity of Demand

Price elasticity of demand means the percentage change in quantity of a good demanded that is associated with a one percent change in price

If the percentage change in quantity is greater than the percentage change in price, demand is elastic

If the percentage change in quantity is less than the percentage change in price, demand is inelastic



Revenue and Price when Demand is Elastic

When demand is elastic, a decrease in price will produce an increase in revenue

Example: 100 units are sold at a price of $100 for

revenue of $10,000 If price is cut to $90, 120 units are sold

for reveue of $10,800



Revenue and Price when Demand is Inelastic

When demand is elastic, a decrease in price will produce an increase in revenue

Example: 100 units are sold at a price of $100 for

revenue of $10,000 If price is cut to $90, 120 units are sold

for reveue of $10,800



Elasticity of Demand for Cocaine

Data on demand for illegal drugs is limited because of the nature of the market

However, some studies have been done. They suggest that demand for cocaine is inelastic

One survey of the literature* found estimates of demand elasticity ranging from -.51 to -.73, indicating that a 1% increase in price reduces quantity sold by less than 1%

Accordingly, revenue from sale of cocaine would tend to increase when the price increases

*Link for elasticity estimates: http://www.nap.edu/openbook.php?record_id=9441&page=30



Implication of Inelastic Demand for Policy

The main strategy in the war on drugs is interdiction of supply, which tends to shift the supply curve upward and to the left

With inelastic demand, we expect interdiction to lead to an increase in revenue for drug cartels

More revenue may not mean more profit, because costs increase

However, more revenue means more money to spend on hiring thugs and corrupting politicians

In that sense, interdiction is a self-defeating strategy that increases, rather than decreases, corruption and drug violence


Cocaine and Heroin Prices Have Fallen Over Time

Despite efforts to reduce supply, prices of cocaine and heroin have fallen over time

Possible explanation: Drug cartels have invested in capital and technology like drug-smuggling submarines that have reduced costs over time despite interdiction efforts

Follow this link to view the original graph from which this one was derived


Organizational Effects of Interdiction Policy

Drug cartels in some respects act like normal businesses Prices affect demand for the product

according to elasticity Part of revenue is reinvested in

technologies to improve delivery and reduce costs

In other ways they are different They recruit people who are not

inhibited by laws or morals They use far more violence in pursuit

of profits The results resemble the structure of

totalitarian organizations as described by Friedrich Hayek

Yet while there is little that is likely to induce men who are good by our standards to aspire to leading positions in a [drug cartel], and much to deter them, there will be special opportunities for the ruthless and unscrupulous. There will be jobs to be done about the badness of which taken by themselves nobody has any doubt . . . [as a result] the readiness to do bad things becomes a path to promotion and power.

Friedrich Hayek, The Road to SerfdomWords “drug cartel” have been substituted for

“totalitarian organization” used in original

Hayek Photo courtesy of Mises Institute http://upload.wikimedia.org/wikipedia/commons/7/7f/Friedrich_Hayek_portrait.jpg


The Bottom Line: Why We are Losing the War on Drugs

As long as demand is inelastic, efforts to restrict supply have the unintended consequence of increasing revenue for drug cartels

Increased revenues are invested in hiring thugs, corrupting politicians, and new delivery technology

Illegal organizations attract violent, immoral people who use violent, immoral business practices

In these respects, the war against drugs creates the conditions for its own failure

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