The Joy of Economics:  Making Sense out of Life
 Robert J. Stonebraker, Winthrop University

Supply-Side Drug Policy: Will It Ever Work?




            No opium-smoking in the elevator.

                                                            .....sign in New York City's Hotel Rand, 1907



            Television and big-screen detective dramas replay the scene endlessly.  Drug deals are "going down."  Police officers arrive and suspects scatter.  Unable to chase everyone, the officers, with a quick calculation of how to allocate their scarce "chase" resources, ignore the would-be buyers and light out after the pusher. After dodging bullets and diving over oncoming cars, the police hero captures the scurrilous miscreant with a flying tackle that scatters back-alley garbage cans.  But the drama does not end.  After all, the street peddler is a mere pawn.  The real targets are the suppliers, the smugglers. A deal is struck: immunity from prosecution in return for the name of Mr. Big.


            For better or worse, such cinematic stereotypes have influenced U.S. drug policy.  Our policy has been "supply-oriented," concentrating on reducing supply more than on reducing demand.  Penalties for users exist, but they are relatively mild.  The real vermin are the suppliers, and we reserve our harshest penalties for them.  Addicts may breed our indignation, but the kingpins of drug cartels foment true outrage.


It has not worked      


            Most economists criticize this supply-side emphasis in drug enforcement.  In the first place, it has not worked.  Despite the billions of dollars spent every year, illegal drugs still cascade over our borders.  If we seal off California, they flow through Texas; if we seal off the water, they come in by air. If we build fences along our borders, trafficers simply knock them down, tunnel under them or, in at least one case, build catapults to throw hundred-pound sacks of drugs over them.1


            Nor have we been able to cut off supplies at their source.  International drug traffickers wield enormous political and military clout.  Illicit drugs are the major cash crop for thousands of poverty-stricken peasant farmers and crop eradication programs meet tremendous popular resistance.  And, if we break the hold of one drug cartel, what is to prevent other entrepreneurs from jumping into the void?  Cocaine pushed out of Peru still easily can be run through Colombia or Ecuador or Bolivia.  Poppy fields eradicated in Afghanistan easily can be replaced by others in Myanmar.  Meth labs wiped out of West Virginia easily can be relocated to Mississippi or to Mexico.  Too many different drugs can be grown in too many different countries and all compete for a slice of the lucrative American market.  The technological barriers to entry are small and the siren call of profits is alluring.  In 2012 a kilo (about 2.2 pounds) of cocaine costing $2,000 in Peru could bring more than $100,000 at retail on the streets on U.S. cities.2 


            Even worse, our efforts might prove counterproductive.  A major reason for controlling drugs is to stem the crime and violence -- the external costs -- associated with them.  Drug-related violence has claimed some 50,000 lives in Mexico since 20063 and put large sections of major cities under virtual siege, as addicts loot the populace to support their habits and as rival suppliers compete for turf.  Estimates suggest that the social cost of drug-related crime is double the health-related costs of drug usage.4  The amount of crime is at least partly related to the flow of dollars through the illegal markets.  An addict must commit more crime to support a $50 per day habit than a $10 per day habit.  By restricting the amount of drugs hitting the streets, government policy decreases the supply and creates a temporary shortage.  This does reduce the quantity of illicit drugs bought and sold but, as in any other market, the shortage drives up the equilibrium price.  The below graph illustrates the effect.

            With quantity down and the price up, the effect on total revenue flowing through the market is ambiguous.  Remember that total revenue (TR) is price times quantity.  If the percentage increase in price is smaller than the percentage cut in quantity of drugs demanded (what economists term elastic demand), TR will fall.  But if the percentage increase in price exceeds the percentage drop in quantity (inelastic demand), TR will rise.


            Unfortunately, addicts are not especially sensitive to price.  Their overall demand for drugs seems inelastic (can you explain why the demand curve drawn above is relatively steep?).  If so, the higher price will more than offset any cut in volume.  Total revenue in the market will rise.  For example, suppose government policy successfully cuts the daily quantity of cocaine sold in an area from 100 to 80 grams (by 20 percent), and that addicts, bidding against each other for the now-scarce substance, drive prices from $50 to $100 per gram (up 100 percent).  Addicts, who originally spent a combined $5,000 for their habits (100 grams at $50 per gram), now spend $8,000 (80 grams at $100 per gram).  Might addicts who collectively need $8,000 to support their daily habits commit more crime than those needing $5,000?  Of course.  Government policies that "successfully" cut drug supplies might actually create even more muggings, murder, and mayhem.  Oops.


Demand-side approaches


            There is an alternative approach.  Instead of trying to choke off drug supplies, focus on demand.  A drop in the demand for drugs will create a temporary glut or surplus on the market; a surplus which will drive street prices down instead of up.  Policies that slash demand result in lower quantities and lower prices.  With quantity and price both down, total revenue and the associated crime, should drop as well.5


            The idea of attacking demand is not new.  Foreign officials have argued for years that if anyone is to blame for international drug trafficking, it is the American users.  As long as there is a demand for illicit drugs, someone will provide the supply.   But how can we do it?  What policies can shift demand? 


            Rhetoric and education might help.  Anti-drug commercials and "just say no" campaigns might deter some potential users.  Drug treatment programs are a second possibility.  Since a small number of addicts can consume huge quantities of illegal drugs, a relatively few successful rehabilitations might create a relatively large drop in demand. Dollars spent on drug treatment might be considerably more effective than incarceration in reducing drug-related crime.California has experimented with a program that offers non-violent drug abusers treatment rather than imprisonment. While not all users referred to treatment follow through successfully, the early results are encouraging.  According to a UCLA study, the initiative has saved taxpayers $2.50 for every $1 spent.7 


            Economists routinely think in terms of taxes and subsidies.  To decrease the demand for bananas, we would advocate heavy taxes on banana buyers, or else large subsidies to make substitute fruits more attractive.  Presumably we could try the same things with illegal drugs. 


            A tax approach might mandate harsher sanctions against users, even casual or first-time users.  A subsidy approach would try to create attractive alternatives for potential drug users and dealers: perhaps more job training and economic assistance for unskilled youth that see drugs as either a way out of the ghetto, or as a way to forget it.  As a former student wrote, "In Mexico, Colombia, and the streets of the inner-city there is a population that finds prison or death an acceptable risk in the struggle for the good life they see on television....At least the drug trade offers the potential for advancement if one is intelligent and ruthless enough."  The key "is to make alternate occupations more accessible."  The problem will persist, especially in low-income areas, until people can expect "reasonable employment commensurate with their intellectual potential... a lifetime flipping burgers just doesn't fill the bill."8  Education and treatment should not be abandoned, but are not likely to be enough.  Without taxes or subsidies to change user incentives, they may have little effect.




            A more radical approach is legalization.  Although quite controversial, legalization does offer potential gains.  Much of the current drug-related crime occurs as rival suppliers battle for turf and market share both within the U.S. and along supply routes throughout Central and South America and Asia.  In a legal market, suppliers are likely to enforce contracts by recourse to law rather than violence.  Moreover, law enforcement officials, free from having to chase down drug offenders, could reallocate their time and efforts to reducing other types of criminal activity. Drug safety might also improve.  Retail stores that offer branded products meeting government-certified standards could replace back-alley vendors who offer drugs of unknown purity.  Legalization also might create financial benefits.  In addition to the potential tax revenues states might collect on the sale and use of controlled substances, billions of dollars now being spent on drug enforcement and prisons could be saved.


            Legalization certainly would increase the supply of currently illegal substances and bring down prices.  The interesting question is what might happen to demand.  Opponents are convinced that legalization would cause the demand for drugs to soar as hordes of new users "experiment."  Since many of these might subsequently become addicted, the costs to society would quickly multiply.  On the other hand, proponents contend that quantities consumed will not rise significantly.  Stripped of their illicit cloak, drugs would be less alluring to rebellious youth.  If so, the demand for drugs might actually plummet.  And, if we fear that lower prices will push usage up, governments can raise those prices by imposing appropriate taxes.  Moreover, alcohol can be a substitute for products such as marijuana or cocaine.  If so, an increase in drug usage might create a similar decrease in the consumption of alcohol and its related costs.


             Since 2001, Portugal has used a novel, but related, approach.  While possession and use of drugs remains officially illegal, they have been "decriminalized".  The police can stop anyone they find using illegal substances and confiscate the drugs but, instead of imposing criminal penalties, they send the users to "dissuasion commissions" that offer therapy.  There are no fines and no prison sentences. The initial results have been encouraging. Usage rates for most substances seem to have fallen or remained constant and, with the fear of prosecution removed, the numbers of users seeking treatment has risen significantly.9  Similarly, Uruguay has much lower rates of drug usage than the U.S. despite the fact that possession of drugs for individual use in that country never has been illegal.  Several other Latin American countries now are considering similar policies.10  Although several U.S. states recently have moved to decriminalize marijuana, at least for medical purposes, the approach remains controversial.


            Who is right?  It's your call.  Interestingly, drug abuse is not limited to homo sapiens.  Biologists have recorded many animals, all the way from horses to yellow ants, "tripping out" on naturally occurring narcotics.  Even cuddly koalas suffer chemical dependency.  They cling so endearingly to eucalyptus trees because they are addicted to the leaves they are munching.





1.         Keefe, Patrick Radden, "Cocaine Incorporated", New York Times, June 15, 2012

2.         ibid.

3.         ibid.

4.         Dobkin, Carlos and Nancy Nicosoia, "The War on Drugs: Methamphetamine, Public Health and Crime", American Economic Review, volume 99, number 1, March 2009, p. 340.

5.         Graphically, such policies shift the demand curve for drugs to the left, thereby lowering both equilibrium price and output.  Can you illustrate this change?

6.         The Economist, August 10, 2002, page 27 cites a 1997 RAND study that draws this conclusion.

7.         The Economist, April 22, 2006, page 30.

8.         Personal correspondence from James Cricks.

9.         The Economist, August 29, 2009, page 43.

10.       The Economist, June 30, 2012, pp. 37-38.






Testing Yourself


To test your understanding of the major concepts in this reading, try answering the following:


1.         Describe the external effects associated with drugs such as heroin and cocaine.

2.         Use supply and demand curves to illustrate the effects of current U.S. drug policy and explain the problems that it creates.

3.         Explain why economists might prefer demand-oriented demand policies, illustrate with an appropriate graph and list examples.

4.         Explain the possible impacts of legalization on the market for currently illicit drugs.

5.         Discuss Portugal's experience with decriminalization of drugs.



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Last modified 10/29/13