Question

In 1994 two researchers from the RAND Corporation in Santa Monica, California, studied the market for cocaine. They estimated the average price elasticity of demand for the demand for cocaine to be 0.5 in absolute value. At the time, the federal government was increasing its spending on law enforcement to keep cocaine from getting into the country. The goals were to decrease the use of cocaine due to the public health hazards and to lower the rate of drug-related crime.

Is it likely that the government's increasing its spending on law enforcement accomplished its goals? Explain your answer

Answer 1

The price elasticity of demand is estimated to be 0.5, in absolute value.

This implies that demand for the good is inelastic.

To reduce consumption of the good, there are two alternatives:

- shift demand curve to the left

- shift supply curve to the left

(or attempt a policy mix of both the options)

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The federal government has chosen the option of spending more on law enforcement, that means attempting to shift supply to the left.

However, when demand is inelastic, a reduction in supply may not bring about the desired outcome. As consumers are addicted to the good, they will attempt to procure it through any means. Crime rates may actually rise.

It is quite unlikely that the goals will be achieved.

To elaborate further, Total Revenue for a market = Price x Quantity

When demand is inelastic, an increase in price actually raises total revenue. This is because the percentage increase in price will be greater than the percentage decrease in quantity.

In other words, the federal government actions may raise the price significantly. However, this doesn't guarantee that quantity demanded will fall. Total expenditure on the goods will rise, and consumers will have to procure them illegally.

A better and sustainable option is educating the consumers and creating awareness, so that the demand for such goods begins to decline. If demand falls, price and expenditure of the good will also fall.