Question

Notes: Draw separate diagrams for answers to each part of different questions and label graphs according to question (a, b, & c). Do not combine all your answers on one graph. All of your answers should be based on your graphical analyses. Your written explanations should complement what you draw on your graphs.

Thank you!!

2- [War on drugs- 30 points]

War on Drugs refers the U.S. federal government's campaign of prohibition of drugs, military aid, and military intervention, with the stated aim being to reduce the illegal drug trade.
a- What is the impact of this policy (War on Drugs) on the equilibrium of market for illegal drugs? Explain and a use a supply and demand diagram to illustrate your answer. (10 p)

b- What is the effect of War on Drugs on drug producers (cartels) total cost and total revenue? (10 p)

c- Based on your answers to parts (a) and (b), do you think war on drugs is an effective policy in combating drug use and the cartels? Can you suggest a policy (or a combination of polices) that could be more effective in controlling the consumption of illegal drugs and limiting the power of drugs cartels? (10 p)

Answer 1

The policy to reduce illegal trade of drugs would require the government to take certain measures like - strict implementation of laws, shifting resources to programs that work, investing in treatment of drug addiction for the drug addicts to reduce the demand of drugs, penalties on being caught with drugs, etc.

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a.

When highly strict resources are deployed to restrict the illegal movement of drugs in the economy, the supply of drugs would fall. The fall in supply would lead to a price raise in the market, causing demand to fall. The investment in treatment would lead to a fall in demand of drugs but proportionately lesser than supply as treating addiction is not always successful.

DD -- initial demand curve of drugs

SS -- initial supply curve of drugs

Firstly, when restrictions are applied on drugs, the supply of drugs falls leading to a leftwards shift of supply curve from SS to SS'. The prices of drugs would increase to P' and demand would fall to Q'. The new equilibrium point will be where DD intersects SS'.

Secondly, when investment in treatment of drug addiction is increased, the demand for drugs fall leading to a shift in demad curve from DD to DD'. Now, the new demand curve will be intersecting the supply curve in order for the market to be in equilibrium. The quantity further decreases but the price decrease from P' to P". The equilibrium quantity of drugs will be Q" and price will be at P".

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b.

The production takes place in a market at the point where marginal cost is equal to the marginal revenue. And the price is determined by the demand of the goods.

When the prices fall in the drug market due to changes in supply and demand, the marginal revenue from drugs too decrease due to decrease in prices and quantity of drugs. The marginal revenue curve shifts leftwards to MR'.

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c.

The war on drugs when looking through economic point of view will be successful to a point in reducing the drug use. But it would be a success in reality when implemented properly. The main hold of a policy is in the way it is implemented. Planning and approving a policy is one thing and is easier than implementing. Implementation is what decides the success or failure of a policy.

In order to control the consumption of drugs and limiting the power of drug cartels, following measures could be taken :

- increaing the awareness among the people about the consequences of drug use

- Strictness in law implementation

- Increasing the penalties on drug use and drug selling activities

- Keeping a close check on all illegal activities

- Influencing parents to keep a check on their children in order to avoid their attraction towads drugs

- Make treatment and medical supplies available at low costs to overcome addiction

At the end, it's all about implementation.

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