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The Economic Theory of Illegal Goods: The Case of Drugs

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

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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File URL: http://www.nber.org/papers/w10976.pdf
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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
Note: HE PE
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  1. Henry Saffer & Frank Chaloupka, 1995. "The Demand for Illicit Drugs," NBER Working Papers 5238, National Bureau of Economic Research, Inc.
  2. Jonathan Gruber, 2000. "Risky Behavior Among Youths: An Economic Analysis," NBER Working Papers 7781, National Bureau of Economic Research, Inc.
  3. 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.
    • Patrick M. O'Malley & Michael Grossman & Frank J. Chaloupka, 2001. "Marijuana and Youth," NBER Chapters, in: Risky Behavior among Youths: An Economic Analysis, pages 271-326 National Bureau of Economic Research, Inc.
  4. 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.
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