Question

There is a debate about whether sterile hypodermic needles should be passed out free of charge
in British Columbia. Proponents argue that doing so will reduce the incidence of diseases, such
as HIV/ Hepatitis, that are often spread by needle sharing among drug users. Opponents believe
the doing so will encourage more drugs use by reducing the risks of this behaviour. As an
economist asked to assess the policy you must know the following: (a) how responsive the
spread of diseases like HIV/ Hepatitis is to the price of sterile needles and (b) how responsive
drug use is to the price of sterile needles. Assuming that you know these two things, use the
concept of price elasticity of demand for sterile needles and the cross-price elasticity between
drugs and sterile needles to answer the following questions.
(i) In what circumstances do you believe this is a beneficial policy? Explain
(ii) In what circumstances do you believe this is a bad policy? Explain.

Answer 1

(i) This is a beneficial policy:

Demand for needles: The lower the price of sterile needles, the higher will be the demand for sterile needles. So, this will lead to a greater use of sterile needles and hence, the lower will be the spread of diseases like HIV/Hepatitis.

Demand for drugs: The price of sterile needles and the demand for drugs are inversely related with each other which means that as the price of sterile needles increases then as a result the demand for drugs decreases and vice-versa.

This would suggest that the cross price elasticity of demand between sterile needles and drugs is negative.

This would be a beneficial policy if:

• The price elasticity of demand for sterile needles is higher, and
• The cross price elasticity of demand between the sterile needles and drugs is lower.

(ii) This is a bad policy:

This would be a bad policy if:

• The price elasticity of demand for sterile needles is lower, and
• The cross price elasticity of demand between the sterile needles and drugs is higher.