Applying Economics to the War on Drugs
Why do markets dissolve? Is it from lack of supply, or from lack of demand? History has shown us that markets will collapse when supply is brought to zero, such is the case of hunting animals to extinction. Though, even when supply has reached zero, demand never ceases. Substitutable goods will replace the now unobtainable good. So in truth, demand reduction dissolves markets. From the first day of any formal economic training, students are taught the supply curve moves to meet the demand curve. In short, if you want to dissolve a market, dissolve demand. There a certainly no shortage of horses, yet the market for horses contracted to almost zero shortly after the mass production of the automobile became common. This is because demand, not supply, of horses crushed the market. There are countless more examples of this from black and white televisions to telegraphs. This is the approach the United States needs to take towards the War on Drugs.
The issue with dangerous drug abuse in this nation cannot be fixed solely by the reduction of the supply. Only confiscating the drugs causes the supply curve to contract, with the demand curve being constant, which increases the price of the drug. The cost to produce the drug will stay the same. This means the overall market will now be able to obtain more drugs. Yes, with arrests and confiscation, we do see a rise in transaction costs, but so much of the drug trafficking relies on non-monetary aspects that the rise in transaction costs would not be able to offset the benefit. The non-monetary aspect comes in the form of forcing people, under threat of violence, to transport drugs. As long as the market is still profitable, then the flow of supply will continue.
The solution is simple, the execution is not. There must be a contraction of demand. The nation must employ a strategy where the main focus is to reduce the demand for the drugs. Reducing demand lowers the price of drugs, if supply is fixed. Which means less workable capital for the producers to use. Less profitability means less incentive to enter, or remain in the market. Now the general counter claim is lower drug prices should increase quantity demanded. Drugs are not a normal good and would not behave in that order. Hard drugs, such as heroin, are consumed as a utility optimizer, as in they are being used as an exchange mechanism to convert long term benefits to short term benefits. (There is an article here that talks about drug abuse in baseline utility theory: http://www.memonomics.org/theory-thread/base-line-utility-theory-part-1) This means we should not expect a self-correcting factor in relations to the decrease in drug prices.
The challenge is reducing demand. The current institutions are not fitted for this mission. People who are charged with possession, without the intent to distribute, should not just go to prison or be on probation. There should be intensive rehabilitation programs. Rehabilitation programs should also be a public good. The individualist culture that has made the United States an economic powerhouse does not fit well with this institution, but the current way we handle drug abuse in this nation is, simply, not working. Radical, institutional, change is needed. This solutions comes off as a form of social welfare that is atypical in the United States, but it is based on a principle that is near the core of the nation, efficiency. We spend roughly $40,000,000,000 on the war on drugs annually. This cost is not resulting in anywhere close to equal benefit. It is not an efficient use of capital. Free market economic principles dictate that capital will flow to its most efficient point of return. Looking at the composition of the newly forming market, it seems there is a large demand for rehab facilities.
With demand reduction is the optimal solution because it results in a market collapse void of bloodshed. Mexican drug cartel dominate the headlines in Mexico and the Southwestern United States. In order to reduce supply in a more effective manor, nations have taken to attacking the production area in armed forces exercises. The success of these operation are short lived, because production has be incentivized by the price increase caused by the disruption in supply. If demand is brought to zero, production is disincentivized. This means less people will be willing to engage in production, and also means less profitability for the cartels engaged in the market. If brought to the extreme of zero demand, it follows economic rationale to assume production will cease. A cease in production means the end goal of the current strategy will be accomplished, no supply of drugs.
I understand this is a lofty ideal, and I look not to push this as the end all be all solution. Rather, this is a call to show that approach to the stoppage of drug abuse in this nation is being done with the right intent, but in the wrong manner. Economic modelling can apply to virtually all issues, but it shines particularly well in markets such as these. This market structure, cartel, is a complicated one, but all markets structures need demand to function. So, the solution is not to cut supply, but cut demand,