Question

Q3 In an attempt to curb the use of illegal drugs, such as marijuana or cocaine, or the use of harmful legal substances, such as tobacco, governments can use two basic options: (i) decreasing demand through public education and (ii) decreasing supply through legal restrictions or taxes. Explain how each type of policy reduces quantity in affected markets? What is the result on the price as seen by consumers for each type of policy? Which of these two types of policies is likely to have more long-term success? Explain

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Answer 1

Decreasing the demand through public education will reduce the demand and shift the demand curve to the left which will cause the price as well as quantity consumed. In the diagram, initially the demand curve is DD and supply curve is SS and price is OP1 where OQ1 is consumed . Now , because of public education , demand curve shifts to left to D'D' such that price falls to OP2 and quantity to OQ2 , given the supply curve .

On the contrary , decreasing supply through legal restrictions or taxes will cause the supply curve to shift to left such that the price rises and quantity consumed falls . In the diagram b, initially the demand curve is DD and supply curve is SS and price is OP1 where OQ1 is consumed . Now , because of decreasing supply through legal restrictions or taxes. , supply curve shifts to left to S'S' such that price rises  to OP3 and quantity falls to OQ3.

Long term success is likely to be attained by decreasing demand through public education . Incase the government tries to reduce consumption through decrease of supply resulting in raised prices , a black market may flourish because consumers demand is not affected by the price rise .