Question

In Chicago, one of America’s most violent cities, drug arrests have plummeted 42% in the weeks since the city shut down, compared with the same period last year. Part of that decrease, some criminal lawyers say, is that drug dealers have no choice but to wait out the economic slump.

“The feedback I’m getting is that they aren’t able to move, to sell anything anywhere,” said Joseph Lopez, a criminal lawyer in Chicago who represents reputed drug dealers.

Overall, Chicago’s crime declined 10% after the pandemic struck, a trend playing out globally as cities report stunning crime drops in the weeks since measures were put into place to slow the spread of the virus. Even among regions that have the highest levels of violence outside a war zone, fewer people are being killed and fewer robberies are taking place.

Using the logic of supply and demand, explain what is happening in the illegal drug market used by casual users and the market used by addicts. Make sure your answer addresses the following question:

1. In terms of only the market for these drugs, explain which type of consumer bear the largest cost in change? Who is experiencing the largest changes in the welfare measures used by economists (i.e. producer and consumer surplus)?

Answer 1

The illegal drug market can be characterized by certain features, as under:

The users of drugs, can be divided into casual users and addicted users. In terms of price elasticity of demand, casual users have a high degree elasticity. The addicted users have a very low level of elasticity. In other words, addicted users are unwilling to reduce their usage, even when prices are high.

For sellers of drugs, we initially assume that elasticity is unitary. If a higher price is possible, they will supply more, in the same proportion.

Now, due to the shutdown of the city, sellers have been unable to sell much. Criminals have reduced their activities drastically. Due to all this, supply of illegal drugs has decreased.

The effect of this reduction in supply will have a different impact on the type of consumer - casual vs. addicted. These changes are seen in the diagram below:

In both the panels, supply is shifted leftwards by the same magnitude. However, for addicted users, the decrease in quantity is less, and the increase in price is much more. Thus, they will resort to any means to get their drugs.

For causal users, the decrease in quantity is more, and the increase in price is less. This signifies that they will cut down on their usage, and they are not willing to pay a very high price.

Now, in terms of welfare:

The largest reduction in welfare is for the addicted users. For causal users, their welfare doesn't change much. In terms of consumer surplus, addicted users witness a major reduction. This is due to sharp price rise.

For producers, the change in producer surplus will depends on how many addicted users comprise the market. If this ratio is larger, producers will actually gain. If causal users are higher, they will opt out of the market, and producer surplus will fall drastically.

The facts in the case suggest that there is a 42% reduction in drug arrests. This suggests that many casual users now prefer not to use drugs. For total surplus of society, this is a positive change.