Panel Paper: Are Drug Markets Different? Examining the Consequences of Product Illegality

Friday, November 9, 2012 : 10:25 AM
Preston (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Peter Reuter, University of Maryland

Markets for illegal drugs show some similarities to conventional markets: e.g. downward sloping demand curves with price elasticities close to those for alcohol or tobacco. However there may be differences as the state shifts from facilitating, or at least not hindering, markets to active hostile to those markets.  How does that affect efficiency, structure, conduct, and behavior? How much does the conventional economic framework need to be adapted?

This paper considers a number of apparent paradoxes of including 1. Purity.  Heroin regularly travels in large shipments that are substantially impure, even though that increases the risks and costs of smuggling per pure gram of heroin. 2. Price and purity. Within individual markets there is a strong negative correlation between average purity and purity-adjusted price, even though the principal driver of purity-adjusted price is enforcement risk; higher enforcement risk should increase the incentives for more compact (i.e., higher purity) cocaine or heroin. 3. Price response to government intervention. The massive increase in enforcement intensity against sellers in the United States has been accompanied by a large and continued decline in the price of both cocaine and heroin.  For each of these the paper offers potential explanatory factors rooted in a theory of the institutional and behavioral consequences of toughly enforced prohibition.