Economic Issues of Legalizing Drugs There is no way around it, drugs and drug use are ingrained human activities. Every culture has a robust history when it comes to different types of drug use and each also has their own way of dealing with the substances. No matter what our individual or societal views are when it comes to drugs, you have to appreciate the complexity of the world drug trade.
Using the term paper, “The Economics of the Legalization of Drugs” as well as a survey from The Economist (which was used as a reference in the term paper) as jumping off points, this paper discusses the legalization of drugs from an economics perspective. Humans have used various types of drugs through out our history. Ancient cultures “used narcotic plants to relieve pain or to heighten pleasure; they used hallucinogenic plants to induce trance-like states during religious ceremonies.
Natural substances, used directly or in refined extracts, have also served simply to increase or to dull alertness, to invigorate the body, or to change the mood” (Plus, 2003). Even with a diverse world history, when Richard Nixon ran for president of the United States in 1968, he included a strong anti-drug sentiment to his platform, which came to be called (as we still know it today) as the “War on Drugs. ” According to the U. S. Department of Justice Bureau of Justice Statistics website, the amount of arrests for drug abuse violations has increased from just over 500,000 in 1982 to well over 1. million in 2007. Breaking these down to the number of arrests by type of drug law violations, we see that the crime of possession saw roughly 538,000 arrests in 1982 with an increase to over 1. 5 million in 2007. The crime of sales/manufacturing saw roughly 138,000 arrests in 1982 with an increase to over 322,000 in 2007. Putting it into more perspective, the amount of arrests in 1982 were almost 585,000 adults and 91,000 juveniles. In 2007, the numbers increased to 1. 6 million adults and 196,000 juveniles (Bureau of Justice Statistics, 2009).
Based on this information alone, it is clear to see that the amount of money needed to curb drug use, manufacturing, and sales is enormous. One can see just how much money is being spent this year, in real time, from the Drug War Clock on the Drug Sense website http://www. drugsense. org/wodclock. htm. As of Sunday, November 15, 2009 at 3:34:39 pm, the amount of money spent at the Federal level was estimated at almost $18 million. The amount spent at the state level was estimated at $27 million.
This is a total estimate of $44 million spent this year alone. This website makes their estimate based on the information from the Office of National Drug Control Policy. With so much money being spent, one has to ask if the cost of curbing the behavior (and not legalizing drugs) outweighs the benefits of not curbing the behavior (and legalizing drugs). According to “The Economics of the Legalization of Drugs” paper, the survey in The Economist laid out the most important aspect for legalizing drugs as profitability.
Why is it so profitable? Simple, according to this survey: “the amount paid by the consumer on the street for a small amount of any illegal drug is astronomically higher than the cost of producing it. The survey pointed out a 330,000% markup in the price of a kilo of heroin from what the producer receives to what a consumer in the U. S. pays” (“The Economics of the Legalization of Drugs, 2001). Other huge markups for other drugs were also noted. Even with the markup, the worldwide market for illegal drugs is huge.
Actual numbers, of course, have to be guessed at because quantity of sales and prices are not known for certain. “One widely accepted United Nations figure is $400 billion (bigger than the global oil industry), employing around 20 million people and serving 70 to 100 million customers” (Coyle, 2002). This high demand in the face of increased prices shows that the demand for drugs is inelastic. An inelastic demand means that “the percentage change in quantity demanded by consumers is less than the percentage change in price” (Farnham, 2009).
Another aspect addressed by the survey would be what would happen to the high demand if legalization occurred. “The survey points out that it is almost certain that the prices of the drugs would drop significantly if they were legalized, in which case one would have to consider the different effects the price change would have on demand” (“The Economics of the Legalization of Drugs,” 2001). If the cost of the drugs goes down, would that not mean that usage/demand for them would increase?
According to an estimate of this survey, the price would decrease up to 95%, which is significant. It is unlikely that someone that has a $50 a day marijuana habit will continue to expend $50 a day once the price drops, as the lower price would mean that $50 now gets them almost double what they had before. So, since they would spend less to get the same amount of drugs, this frees up more disposable income to spend on other things in the economy. Another consideration to the mark-up of the drugs is the high cost of manufacturing and distributing the drugs.
First, there is a very real danger of being caught by enforcement agents, as noted in the figures from earlier. Second, the inherent violence that comes from being in the trade. It is “widely believed that illegal drugs are responsible for much of the violence in U. S. cities” (Friedman, 1996). With increased enforcement, the price of drugs increases. An increase in the price means that those that use and may be addicted to them would have to come by extra money to purchase them.
This may lead them to commit various crimes in order to get the money they need. “If users commit crimes to pay for drugs, and if the demand for drugs is inelastic, as the usual portrayal of addicts suggests, the result should be increased expenditure on drugs funded by increased amounts of drug-related crime” (Friedman, 1996). So, with the decrease in price that would come from legalization, it would seem that drug related crime would also decrease. Another explanation for the drug-related violence is that it is “a form of rent seeking” (Friedman, 1996).
Rent seeking in this case would be those involved with the manufacture and distribution of drugs are seeking to gain a monopoly advantage thru manipulation or exploitation rather than thru earning profits thru economic transactions. “Criminal firms have local monopolies, which they must defend against the competition of rival firms. The greater the monopoly profit, the more will be spent trying to capture or defend turf” (Friedman, 1996). Another possibility for the violence would be insecure property rights felt by drug dealers. Basically, there is no guarantee that dealers can keep hold of the “property” they hold (i. . , the money they have made or the drugs that they carry). “Drug sellers have lots of portable wealth in the form of money and drugs, and do not have the option of calling the police if someone steals it. The result is violence by drug dealers defending their property and by other people trying to steal it” (Friedman, 1996). Fear of being caught by enforcement agents, rent seeking, and insecure property rights all make the expense of illegal drugs increase. An increase in doing business causes a higher price in the product themselves.
The actual physical cost of transporting and selling the drugs would not be any higher than the transportation of any other product. “What really drives up the price is the high opportunity costs associated with transporting and selling drugs” (“The Economics of the Legalization of Drugs,” 2001). If the drugs were legalized, then the cost of manufacturing and distributing would decrease, which would cause the price to fall. One could assume that those involved in the drug trade could do something else that did not pose a risk to their freedom due to arrest or to their and other’s lives thru violence.
So, why would anybody do it? The payoff must be substantial enough to make it worthwhile. “The high willingness to pay for the drugs by the consumers allows the distributors to charge enough money to meet, and likely exceed, these required amounts. The survey shows that this seems to hold true all the way from the dealers on the streets to the large cartels that bring the drugs to the U. S. ” (“The Economics of the Legalization of Drugs,” 2001). If drugs were legalized, this would allow most countries to produce and distribute their own drugs themselves.
If they did not produce them themselves, they would at least have the ability to regulate where and who the drugs came from. This would severely reduce the amount of money flow to those countries that currently produce and distribute the drugs. Most countries that produce illegal drugs are very poor, and the drugs are their major cash crop. “The earnings potential of the industry, combined with their other economic problems like failing commodity prices and heavy debt burdens, has probably led to a substantial increase in drug production by developing countries” (Coyle, 2002).
It is true that the producers could just grow something else. But, the high profits that can be earned, as discussed, have kept them producing the illegal drugs. “This virtually guarantees that these farmers can make far more money from their land by cultivating drugs than they could by producing anything else. It also makes their land far more valuable since there are only limited areas in the world where cultivation of drugs can take place without too much interference. ” (“The Economics of the Legalization of Drugs,” 2001).
Another benefit from legalization would be the ability to tax the drugs. With inelastic demand, consumers would not decrease their demand just because of a change in price. Legalization would cause a decrease in price, but this can be made up in the form of huge tax levies on the drugs. This additional revenue that is not currently being generated can be put towards current programs as well as new programs for an adverse health effects that the drugs may cause. There are many arguments against the legalization of drugs.
But, from a purely economic standpoint, legalization makes sense. The demand for drugs is inherently inelastic. So, there will be a market for it regardless of the legality. Legalization would free up disposable income by users to spend elsewhere. It would reduce crime and the cost to enforce laws. Lastly it would generate needed revenues for local and federal level government for various programs. References Plus, I. (2003). Information plus illegal drugs November 2003. Wylie, Texas: Information Plus. “The Economics of the Legalization of Drugs. 2001. Bureau of Justice Statistics, . (2009, August 17). Drugs and Crime Facts Enforcement. Retrieved from http://www. ojp. usdoj. gov/bjs/dcf/enforce. htm Drug Sense, . (n. d. ). Drug war clock. Retrieved from http://www. drugsense. org/wodclock. htm Coyle, D. (2002). Sex, Drugs, and Economics: An Unconventional Introduction to Economics. New York, NY: Texere Publishing. Farnham, P. G. (2009). Economics for Managers 2e. Boston: Prentice Hall. Friedman, D. (1996). Hidden Order: The Economics of Everyday Life. New York, NY: Harper Collins.