Substance abuse has been on the political front burner for decades. Standard approaches to this problem emphasize punishing users somewhat, but dealers much more harshly. This reduces demands for drugs somewhat, while supplies shrink far more. The result is that illicit drug prices are much higher than free-market prices would be, and addiction poses more problems for the rest of society.
Suppose S0 and D0 in Figure 10 represent the demand and supply of cocaine if it were legal. The price, P0, would probably fall somewhere between the prices of aspirin and antibiotics, because cocaine production is not complex, nor are currently legal narcotics very expensive. (Some estimates suggest that completely legalized and untaxed marijuana would sell for about $11 a bale–roughly the price of prime hay.)
Figure 10 The Market for Cocaine
Prosecuting dealers reduces supply more than demand, boosting the price from P0 to P1. This makes dealing extremely profitable. Harsher prosecution of addicts might reduce demand to D2, eliminating much of this profit. Alternatively, giving drugs to addicts through government clinics might dry up both demands and supplies. Supply would shrink because catching and prosecuting dealers would be easier.
Penalizing cocaine users reduces demand to D1, while the stiffer punishment of dealers reduces supply to S1, boosting the price to P1. This higher price makes dealing extraordinarily profitable for criminals willing to live dangerously; successful dealers live luxuriously. Violence in pursuit of high profits from dealing has become the norm in the drug business. But impoverished addicts often move into prostitution, burglary, mugging, and other street crimes. Thus, higher crime rates are among the social costs of policies that reduce the supply of cocaine more than the demand for it.
One alternative approach is legalization, which has been tried in the Netherlands, where the traffic in drugs is monitored and regulated, but largely unprosecuted. The results somewhat support advocates of legalization, who argue that allowing drugs to be governed strictly by demand and supply would make drugs so cheap that few addicts would feel driven to commit crimes against others. Heroin addicts, for example, would tend to spend a lot of time in a daze, bothering the rest of us no more than derelict alcoholics. Most Americans, however, are unwilling to let others waste away their lives in such a fashion.
What policies might slash drug abuse below Q0 (the free-market amount, shown in Figure 10) without pushing addicts to commit crimes? Punishing users far more than currently would reduce demand to, say, D2, and could cut cocaine prices, dealers' profits, and rates of addiction to Q2. Most people, however, are reluctant to impose life sentences or the death penalty to punish drug users, especially when minors or experimenters are involved.
Paradoxically, allowing clinics to freely provide drugs to proven addicts while stiffly penalizing dealers might suppress both addiction and the crime it fosters. Suppliers would be left with only experimenters as potential customers, so over time, this policy could reduce the illicit demand for drugs below D2. Dealers would be more exposed to undercover investigation because they would not know their customers, and illegal supplies of drugs should dry up. A similar approach used in England for almost three decades appears to work reasonably well. However, it does not cure all addicts, which causes some people to criticize the program as a failure.
Do simple solutions exist for such problems as teenage unemployment and drug abuse? Should market forces operate without controls? Answers to such questions depend, in part, on the specific market conditions. Any answer is normative–economists cannot definitively say what we "should" do, but we can point out how various policies operate in hopes that laws consistent with economic theory will eventually be enacted. Federal policy increasingly stresses curbs to demand–educational programs and rehabilitation–in addition to the supply-side emphasis long relied on to cope with substance abuse. Most economists would applaud this shift in approach.
Supply and demand exert considerable muscle regardless of which allocative mechanism is used to resolve any problem. We hope that these brief overviews of price controls, minimum-wage laws, and the market for drugs convince you that market forces cannot be ignored when structuring social policies, even in areas closely tied to people's views of morality.