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Can Supply Restrictions Lower Price? Violence, Drug Dealing and Positional Advantage

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Listed:
  • Caulkins Jonathan P

    () (Carnegie Mellon University)

  • Reuter Peter

    () (University of Maryland)

  • Taylor Lowell J

    () (Carnegie Mellon University)

Abstract

The standard model of markets for illicit drugs predicts that tougher enforcement against sellers will raise prices; yet cocaine and heroin prices have fallen substantially during a period of massive increases in enforcement. We present a model in which the basic mechanisms at work in the textbook model may be substantially altered by an important feature of illegal markets—violence that creates inheritable heterogeneity along a dimension that both determines relevant production cost and imposes externalities on other suppliers. Dealers frequently make use of violence and threat of violence in the normal course of trade. A seller who is particularly effective in the use of violence may face lower enforcement costs than other dealers and generate an external cost borne by those sellers. Together these features generate a number of counter-intuitive policy implications. For example the arrest of a particularly violent dealer reduces external costs borne by other dealers. The net effect is a possible reduction in costs for the marginal dealer and hence a reduction in price.

Suggested Citation

  • Caulkins Jonathan P & Reuter Peter & Taylor Lowell J, 2006. "Can Supply Restrictions Lower Price? Violence, Drug Dealing and Positional Advantage," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-20, January.
  • Handle: RePEc:bpj:bejeap:v:contributions.5:y:2006:i:1:n:3
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    Citations

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    Cited by:

    1. Manolis Galenianos & Rosalie Liccardo Pacula & Nicola Persico, 2012. "A Search-Theoretic Model of the Retail Market for Illicit Drugs," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1239-1269.
    2. 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.
    3. Prieger, James E. & Kulick, Jonathan, 2014. "Unintended consequences of enforcement in illicit markets," Economics Letters, Elsevier, vol. 125(2), pages 295-297.
    4. L. Leoncini & F. Rentocchini, 2010. "Counteracting cocaine production. An analysis based on a novel dataset," Working Papers 693, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Flores, Daniel, 2016. "Violence and law enforcement in markets for illegal goods," International Review of Law and Economics, Elsevier, vol. 48(C), pages 77-87.
    6. Howard Bodenhorn, 2016. "Blind Tigers and Red-Tape Cocktails: Liquor Control and Homicide in Late-Nineteenth-Century South Carolina," NBER Working Papers 22980, National Bureau of Economic Research, Inc.

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