Association for Public Policy Analysis & Management

In 2001, Australia experienced a rapid reduction in the availability of heroin and a sharp increase in price. As a measure of the remarkable change in the heroin market, Moore et al. (2005) showed that the price-per-pure-gram of heroin increased by more than 700% in less than six months. The putative "heroin shortage"—thought to be due to drug interdiction—led to large short-term reductions in heroin use and overdoses, followed by an increase in drug treatment admissions (Degenhardt et al., 2006; Weatherburn et al., 2003). This heroin shortage provides a natural experiment that can also be used to understand the long-term effects of making the drug harder to obtain and more expensive. Given the importance of understanding the negative consequences of illicit drug use, and especially the implications of the recent “heroin epidemic” in the United States, it is vital to understand the impact of prior abrupt supply shocks (Dobkin and Nicosia, 2009).

Using more than 20 years of administrative data from criminal justice and health agencies, we evaluate the impact of the shortage on heroin users who were active prior to the 2001 shock. Our detailed microdata allows us to estimate effects across a wide variety of outcomes including mortality, hospital admissions, methadone prescriptions, incarceration, property and violent crime, and substitution to other drugs. Our data come from New South Wales­­— ­ Australia’s most populous state that includes Sydney— and our primary sample consists of more than 10,000 individuals known to have used heroin between 1994 and 2001, either through being arrested for heroin possession or through their drug treatment history.

We first establish patterns in crime and health outcomes before and after the heroin shortage for this group through an event-study analysis. To control for other potential confounding factors that could impact health and crime outcomes in NSW, we also conduct a difference-in-difference analysis by incorporating data for individuals who are criminally active but do not appear to be active heroin users. In our current analysis, we find that there are impacts in terms of health and crime that suggest there were benefits to reducing heroin, but some level of drug substitution. Our results provide insight into whether major disruptions to illicit drug markets affect users’ overall health and criminality and should be of widespread interest to economists, other academics and policy makers.