Economics of Drugs

Earlier, I discussed comments made by Gary Becker that addressed the issue
of legalizing illicit drugs. While I was unable to locate any information
regarding the effects on inner-city youth, I did find an interesting
discussion detailing the impact legalization would have on consumption.
Certainly prices would fall, but the corresponding change in quantity
demanded is the question to be answered. If this were an introductory
economics class we would analyze the change in policy through a series of
graphs. The following figure, for example, illustrates the current policy,
where legal barriers increase the risk of bringing goods to the market. The
demand curve is relatively inelastic, showing that changes in price result
in relatively unresponsive changes in the quantity demanded.

Legalizing drugs would cause a shift in the supply curve, S1 to S2; as a
result, a new market equilibrium point is determined. This new equilibrium
represents a solution corresponding to a lower market price and higher
market quantity. A simplistic representation and one that provides a
generally intuitive example. However, this static realization fails to
address the question of how much the actual quantity will change. Is it
enough to know that consumption will increase, or is it more important to
know the magnitude of such a change. One issue is the usage of a linear
demand curve. Naturally, it is generally assumed that demand functions for
addictive goods are inelastic. However, the computed elasticity for a linear
demand curve is not constant, and in fact encompasses the entire permissible
range of elasticity, . The problem can be easily addressed by
substituting a constant elasticity demand curve in place of the linear
specification. But, consumption of an addictive good has dynamic
implications as well. This is why the Becker-Murphy Rational Addiction model
is so promising. Next time we’ll discuss the implications of the Rational
Addiction model and consumption estimates for the change in policy.