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December 2007
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Supply Side Economics

They’re So Scared They Put 20 Tons on One Ship! by Jacob Sullum at Hit and Run

Is a rising seizure total a sign of success or a sign that the volume crossing the border has increased? Is an increase in large-volume seizures a sign of smugglers’ desperation or a sign that smugglers are not terribly worried about interdiction, treating the risk as a cost of doing business? […]
However much the Coast Guard seizes, enough drugs always get through to meet the demand. The most drug warriors can expect is to temporarily increase prices by raising traffickers’ cost of doing business. Since the cost of replacing seized drugs is very small compared to their retail value, with most of the markup occurring after they arrive in the U.S., interdiction is a highly inefficient way of discouraging drug use. But don’t tell John Walters. The drug czar thinks “every load of drugs seized represents that much less that can be used to poison our young people and harm our nation.”

And that is the point, exactly, why supply side interdiction bragging is absolutely moronic — particularly with an illegal commodity, where the markup is so high (many reports peg the the markup for cocaine at 100:1.
Let’s take a made-up example to demonstrate:
Bob Wilson owns a factory that makes widgets. For some strange reason, these widgets are in high demand and there isn’t much competition out there. It costs Bob ten cents per widget in manufacturing costs, but he can sell them in the stores for $10. He sells a million widgets each year for a total income of $10 million and a total manufacturing cost of $100,000 (for a gross profit of $9,900,000). Not bad.
But these widgets are popular, and Wilson’s Widgets is in a bad section of town, so some of his shipments out of the factory get highjacked and the widgets stolen. Bob doesn’t like it, and he does what he can to disguise the trucks, or send them out at unusual times, but he knows that a certain percentage of them will be lost.
Does this mean he won’t be able to sell a million widgets in the stores? Of course not! He has a factory — he just makes more widgets. If a truck gets highjacked, he sends out another truck.
But what about the financial cost of all those lost widgets? Won’t that dramatically change the price? Let’s take a look.
Assume that ten percent of Wilson’s Widgets normal annual production are highjacked. That’s significant. That means that he’d have to make an additional 100,000 widgets at a cost of $10,000 to replace the highjacked widgets. That extra cost means raising the price in the stores to make up for the losses, right? Gee, I wonder if that will get expensive…
In order to make the same gross profit of $9,900,000, Bob will have to raise the price in the stores from $10 per widget to… $10.01
That’s right. A penny more.
If half of Wilson’s Widgets’ usual million widgets were highjacked, so that Bob had to manufacture an additional half million widgets, the price would go up from $10 to… $10.05
If two million widgets were highjacked, so that Bob had to manufacture three million in order to supply one million, the price would go up from $10 to… $10.20
There is no way that supply side interdiction can work, unless you can seize 100% of all product — an impossibility in the illicit drug market.
Now, the example I gave above is simplified somewhat to make the numbers easier — drug cartels have additional costs along the process (transportation, bribes, middlemen, etc.) — but the principles remain the same.
One difference between the widgets and the cocaine, however. In the Wilson scenario, an assumption is made that the crooks don’t do anything with the widgets they highjacked (it might be helpful to imagine it as a percentage of the widgets having melted, rather than being stolen). It’s hard to imagine crooks highjacking all those valuable widgets without going into business. If they were to sell all those widgets that they stole, then it could dramatically cut into Bob Wilson’s widget business and he’d stop making money.
However, with cocaine, the federal government obligingly destroys what they highjack (for the most part), keeping the rest of the supply highly profitable for the cartels.
Study Question:

Supply-side interdiction of illicit commodities is:

  1. A stupid idea
  2. A really stupid idea

Thus ends the Economics 101 lesson.

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