Chapter 17: Drugs and Prostitution

Chapter 17Drugs and ProstitutionChapter OutlineAN ECONOMIC MODEL OF MARKET FOR DRUGS AND PROSTITUTIONARGUMENTS FOR MAKING A GOOD ILLEGALDECRIMINALIZING DRUGS AND PROSTITUTIONConsumer and Producer Surplus AnalysisQ/tPDemandSupplyAP*BC0 Q*Value to the Consumer: 0ACQ*Consumers Pay Producers: OP*CQ*The Variable Cost to Producers: OBCQ*Consumer Surplus: P*ACProducer Surplus: BP*CThe Importance of ElasticityIf people are addicted to a particular drug, their demand for it will be inelastic.Drug interdiction efforts shift the supply curve to the left.This will cause prices to riseAddicts will not reduce quantity demanded muchRecreational users will reduce quantity demanded moreArguments for Making a Good Illegal People have limited information about the good, are not capable of making a good decision about the good or the good is addictive and one-time users can not learn from their mistake.There are externalities, effects of a transaction that hurt or help people who are not a part of that transaction, involved in the production or consumption of the good.The good is immoral.Preventing Bad Decisions Economists are typically reluctant to assume that people can not make good decisions.Drugs tend to be an exception to this rule because they are addictive.Modeling ExternalitiesSMarginal CostD(Marginal Benefit)Q*P*PDrugs/Prostitution0Social CostExternal CostQ’P’Examining the Externalities30% of all violent crimes (38% for rapes) are committed while the perpetrator is on drugs. 80% of inmates in jail, detention, or prison used drugs during the month leading up to their arrest. there are nearly 23,000 drug-related homicides every year. Battling Negative Externalities While Creating OthersMuch of the drug violence that exists, only exists because of laws criminalizing drug use. If cocaine, methamphetamine, and marijuana were legal and inexpensive, there would be less of a need for addicts to rob in order to get money to buy them. there would be no drive-by shootings to protect turf. The Impact of Decriminalizing Drugs or ProstitutionSillegalDillegalDlegalSlegalQlegalPlegalQillegalPillegalPQSubstituting Taxation for CriminalizationD (Marginal Benefit)The Offending GoodPP*Q*S (Marginal Cost)OSocial CostP’Q’}Tax=External Cost