Question

3 queastion:

1.the economics of prohibition depends upon the microeconomic theories of behavior

2.price elasticity of demand with regard to addictive consumption

3.standard economic theory, discuss the monopoly and other models that explain the supply of illicit drugs

Answer 1

1. Prohibition is based on microeconomic policies because like microeconomics prohibition also deals with every day concepts. Prohibition has an ever-increasing impact on our daily life. In the United States, prohibition against certain drugs, involving "wars" on them, has become one of our most visible and hotly debated national problems. The purpose of the following investigation is to improve our understanding of the origins and results of prohibition, and therefore indirectly to contribute to future policy-making, shifting it toward rationality.
At the core of this book, one of the first theoretical investigations of prohibition, is an economic theory of prohibition, which defines
prohibition as a government decree against the exchange of a good or service. Recent studies of decrees against cocaine, heroin, and mari-
juana suggest that these prohibitions impose heavy costs and are extremely difficult to enforce. Beyond such costs and enforcement
difficulties, however, I argue that effective prohibition is impossible to achieve, because the unintended consequences of prohibition itself preclude any benefits.

2. Price elasticity of demand for illicit drugs is the percentage change in demand for illicit drugs per percentage change in price of illicit drugs. There are few direct empirical studies on the price elasticity of demand for cocaine, marijuana, heroin, and other illicit drugs. Nisbet and Vakil (1972) provided an early estimate of price elasticity of demand for marijuana. Their data on both the quantity purchased monthly and the purchasing price were from an anonymous mail survey of UCLA students.
Conditional on purchasing, their estimate was in the range from -0.37 to -1.5 1, depending on
whether the regression’s functional form was double-log or linear.
Several authors have estimated price elasticities using national survey data. Based on pooled data from the 1988,1990 and 1991 NHSDA surveys and Drug Enforcement Administration’s STRIDE price data, Saffer and Chaloupka (1995) found that the annual participation price elasticities for
heroin and cocahe are -0.90 and -0.55, respectively, and monthly participation price elasticities are -0.80 and -0.36, respectively. Assuming that the use price elasticity conditional on participation is about the same size as the participation price elasticity, they claimed that heroin’s price elasticity is
about -1.80 to -1.60 and cocaine’s is about -1.10 to -0.72: Based on data from the Monitoring the Future (MFT) surveys, Chaloupka, Grossman, and Tam (1996) estimated both the participation price elasticity and the use elasticity conditional on participation, separately, using Cragg’s two-pat
regression models. Their results showed that for annual data, the participation and use price
elasticities are -0.89 and -0.40, respectively; for monthly data, they are -0.98 and -0.45,
respectively.

3.Reuter’s seminal work on drug supply (for example, Reuter, Crawford and Cave, 1988) challenged the effectiveness of source country and interdiction activities. This case has been reinforced by Rydell and Everingham (1994). In brief, these arguments rest on one key observation and one basic assumption. The observation is that the costs of producing and transporting cocaine to the United
States and across its borders is a small fraction of the retail price of cocaine. The assumption is that the price markup from the U.S. border to U.S. city streets is additive. That is, the retail price PR is a linear function of the price at the border PB and a markup: MI, so:

P_{R =} P_{B +} M₁
Thus, even if source country and interdiction programs are effective at (say) doubling the cost of cocaine at American borders, the effect on street prices will be minimal because M1 is large relative to e PB. Others (for example: Crane, Rivolo and Comfort, 1997) have challenged this conclusion, finding to
the contrary, that source country programs have had a signifcant effect on street prices for cocaine.
They argue that street prices are a multiple of prices at the border. That is, the retail price is a
multiplicative function of the border price, so:

P_{R =} P_BM₂
While they do not necessarily agree with Crane and his colleagues, others (Caulkins and Padman, 1993; Rhodes, Hyatt and Scheiman, 1994; DeSimone, 1998) present evidence that is consistent with the multiplicative model, thereby adding support to Crane’s position.
Recent discussions at a National Research Council workshop (Manski, Pepper and Thomas, 1999) seem to suggest that neither the Rydell and Everingham nor the Crane, Rivolo and Comfort positions are convincing. There is much to learn about the costs of producing, transshipping and distributing illicit drugs. There exists a need to better understand how drug prices are marked-up from the border
to the street.
Researchers have made remarkable progress during the last decade at developing price series for illicit drugs.

According to that latter paper, domestic price markups for cocaine and heroin appear to be additive at the lower distribution levels and multiplicative at the higher distribution levels. In effect, the retail price is a mixture of multiplicative and additive elements, best written as:

P_{R =} P_BM₂ + M_{1 .}