Question

In 2004, Congress allocated over $20 billion to fight illegal drugs. About 60 percent of the funds was 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?

Answer 1

Higher drug prices may lead to lower level of drug consumption and drug related harm but it does not mean that more frequent arrests of drug traffickers , more seizure of drugs will lead to higher drug prices or lessen the availability of drugs as drug manufacturers may keep stock to cover the shortage.Drug manufacturers may ship more than is needed to cover the loss and  so there may be less benefit from supply control measures.However it is expected that supply side measures will reduce the supply and so shift the supply curve to the left. As a result price will rise and quantity sold will fall.

The percentage change in total consumption as a result of 1% change in price is referred as demand elasticity. For drugs like  cocaine and canabis the elasticity of demand is estimated as -0.5which means that demand falls by 0.5% when there is increase in price by 1%.Supply side measures like increasing the prices of drugs will affect producers as with price rise demand will go down and they will earn less revenue.

Treatment can be regarded as one of the strategies  that would reduce the demand for drugs.If drug users can be removed from the drug marketplace through getting engaged in treatment,demand for drugs may be removed.Abstinance from drugs even if it is temporary will reduce the demand for drugs.This reduction of demand will depend on the population being treated and the duration of the treatment.Reduction in demand will shift the demand curve to the left and so there will be fall in prices and reduction in quantity demanded.

The shift in the demand curve to the left will affect the profit of the producers because of less price and less quantity being sold.Revenue generated will be less.