Question

In 2004, Congress allocated over $20 billion to fight illegal drugs. About 60 percent of the funds were directed at reducing the supply of drugs through domestic law enforcement and interdiction. Some critics of this approach argue that supply-side approaches to reduce the drug supply actually helped drug producers.

• Demonstrate graphically the effect of supply-side measures on the market for illegal drugs.
• Explain how these measures affect drug producers. (Hint: Consider the elasticity of demand).
• Demonstrate the effect of demand-side measures such as treatment and prevention on the market for illegal drugs.
• How does the shift in demand affect the profitability of producers?
• submit your graph as a jpg attachment in your original discussion post

Answer 1

In the market for drugs, supply can be taken as close to unitary elastic, and demand can be taken as highly inelastic.

This is because for a percentage change in price, quantity supplied can be changed easily. However, quantity demanded cannot be changed, as consumers of drugs are addicted to it.

Hence, there is debate over whether supply side measures are more effective than demand side measures.

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Supply side measures attempt to shift the supply curve to the left. Doing so will raise the price and reduce the quantity demanded. But since demand is inelastic, the percentage change in price is much higher than the percentage change in quantity demanded.

As a result, there is no major reduction in consumption of drugs, but the price of drugs rises sharply. This means that now the total revenue of drug-sellers actually rises.

In fact since the price of drugs rises, consumers may also resort to crime to acquire the money for drugs.

As can be seen in the diagram, the supply side measures cause price to rise to P", and quantity to fall to Q". The new area P"Q" is larger than the old area PQ, indicating revenue of sellers has actually risen.

The reduction in quantity is very low, which means that people are still using drugs.

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Demand side measures are much more effective. Through training and counselling, consumers are made to free themselves of this addiction. Thus, rather than reducing supply, demand is reduced. The market itself disappears, as people no longer want drugs. This involves the help of the community, medical staff and the families as well.

As can be seen from the diagram, if consumers themselves stop consuming (or reduce it significantly), the effect is much better. Now, the price and quantity of drugs, both fall. This means that the revenues of drug sellers falls, and they may stop this business altogether. The new area P"Q" is much smaller than the old area PQ.

This outcome is only possible if society becomes more aware and educates citizens. This also leads to a fall in criminal activities of both buyers and sellers.