Question

The U.S. government's focus on supply reduction efforts in its "war on drugs" has been relatively unsuccessful at addressing illegal drug use. Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example, through drug education and voluntary treatment programs for addicts.

a) What will happen to the equilibrium price, quantity, and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine?

b) Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine. As a result of the reduction in supply the price of cocaine increases by 25 percent. If the price elasticity of demand is -.5, what is likely to happen to the incentive to sell cocaine?

c) Based on your answers, explain why one approach might be preferred over the other.

Answer 1

a) If the government is able to reduce the demand for the Drugs, the demand curve of the cocaine will shift to the left reducing the price of the cocaine and quantity sold in the market. As the quantity sold and the price comes down the revenue of people selling drugs will also come down. Decreasing the revenue will affect the incentive to sell cocaine inversely and people may give up selling drugs.

b) If the government is able to restrict the supply of the drugs this will shift the supply curve to the left i.e. at a higher price and lesser quantity. As the demand for cocaine is not very price elastic this will increase the profit of those selling the drugs and make the business more profitable. Giving people more incentive to increase the business.  

c) The approach of reducing the demand for the drugs is more effective because it will take away the very incentive to sell drugs. This will reduce the supply of drugs in the long run and help people get away from this curse.