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The Economic Theory of Illegal Goods: The Case of Drugs

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  • Gary S. Becker
  • Kevin M. Murphy
  • Michael Grossman

Abstract

This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10976.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:10976

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References

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  1. Rosalie Liccardo Pacula & Michael Grossman & Frank J. Chaloupka & Patrick M. O’Malley & Lloyd D. Johnston & Matthew C. Farrelly, 2001. "Marijuana and Youth," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 271-326 National Bureau of Economic Research, Inc.
    • R. L. Pacula & M. Grossman & F. J. Chaloupka & P. M. O'Malley & L. Johnston & M. C. Farrelly, 2000. "Marijuana and Youth," NBER Working Papers 7703, National Bureau of Economic Research, Inc.
  2. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
  3. Jonathan Gruber, 2001. "Risky Behavior among Youths: An Economic Analysis," NBER Books, National Bureau of Economic Research, Inc, number grub01-1, May.
  4. Henry Saffer & Frank Chaloupka, 1995. "The Demand for Illicit Drugs," NBER Working Papers 5238, National Bureau of Economic Research, Inc.
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Cited by:
  1. Yunker, James A., 2012. "Estimated optimal drug law enforcement expenditures based on U.S. annual data," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 356-371.
  2. World Bank, 2010. "Crime and Violence in Central America : A Development Challenge - Executive Summary," World Bank Other Operational Studies 2979, The World Bank.
  3. Rosalie Liccardo Pacula & Beau Kilmer & Michael Grossman & Frank J. Chaloupka, 2007. "Risks and Prices: The Role of User Sanctions in Marijuana Markets," NBER Working Papers 13415, National Bureau of Economic Research, Inc.
  4. Dhaval Dave, 2004. "Illicit Drug Use Among Arrestees and Drug Prices," NBER Working Papers 10648, National Bureau of Economic Research, Inc.
  5. Philip A. Curry & Steeve Mongrain, 2007. "What You Don't See Can't Hurt You: An Economic Analysis of Morality Laws," Discussion Papers dp07-05, Department of Economics, Simon Fraser University.
  6. Slim, Sadri, 2009. "Du refus de vente au don: une explication de la formation du prix par l´affect
    [From rejection of exchange to gift: regard as an explanation of prices]
    ," MPRA Paper 15317, University Library of Munich, Germany, revised 24 Apr 2009.
  7. Lippai, László, 2010. "Fogyasztói önkontrollt igénylő döntések empirikus vizsgálata
    [An empirical examination of consumer decisions requiring self-control]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 700-714.
  8. Cláudia Costa Storti & Paul De Grauwe, 2007. "Globalization and the Price Decline of Illicit Drugs," CESifo Working Paper Series 1990, CESifo Group Munich.
  9. Leonardo Raffo López, 2010. "Narcotráfico y conflicto: ¿por qué bajó el precio de la cocaína?," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 12(23), pages 229-258, July-Dece.
  10. Carlos Dobkin & Nancy Nicosia, 2009. "The War on Drugs: Methamphetamine, Public Health, and Crime," American Economic Review, American Economic Association, vol. 99(1), pages 324-49, March.
  11. Michael Grossman, 2004. "Individual Behaviors and Substance Use: The Role of Price," NBER Working Papers 10948, National Bureau of Economic Research, Inc.
  12. Dhaval Dave, 2004. "The Effects of Cocaine and Heroin Prices on Drug-Related Emergency Department Visits," NBER Working Papers 10619, National Bureau of Economic Research, Inc.
  13. Sylvaine Poret, 2006. "L'impact des politiques répressives sur l'offre de drogues illicites. Une revue de la littérature théorique," Revue économique, Presses de Sciences-Po, vol. 57(5), pages 1065-1091.

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