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The economics of drug supply

Supply-side drug warriors have generally taken the position that the idea behind eradication and interdiction is that you drive up the price of the illegal drugs (and in fact, people like John Walters used to get extremely excited over isolated local reports of increased prices for some drugs).

Problem is, they never really took it past that step. It was almost like an underpants gnomes version of drug policy

  1. Reduce supply
  2. Prices go up, making it harder for people to buy it.
  3. ???
  4. Win the drug war

The problem is, that any first year economics student could tell them that step 2 is not an end result, but rather a temporary economic glitch. If step 2 actually happens, then that sends information into a feedback loop that stimulates supply.

The actual formula looks a little more like this…

  1. Reduce supply
  2. Prices go up, making it harder for people to buy it.
  3. Increased demand and higher profits attract additional producers, increasing the supply
  4. Prices go down, making it easier for people to buy it.

Rinse and repeat. … at great cost.

At the same time, supply-side drug warriors have told us that if they didn’t constantly slow the supply of drugs, there would be an almost infinite expansion of drug use — that more drug availability would always equal more drug users (and thereby abuse and social costs, etc.).

Again, someone who didn’t sleep through the last half of their beginning economics course, could tell them about a thing called elasticity of demand. Now this one’s a little more complicated, and there are a lot of factors involved, such as substitution, etc., but basically it says that a product that is more price elastic is more likely to have demand affected by price (a higher price, people stop buying it; a lower price, people buy more), whereas a product with price inelasticity is less likely to be affected by price.

With illicit drugs, most are relatively inelastic (except for the substitution factor), so that a drop in price will increase use somewhat, but only to a point, at which time no more people wish to use that drug or consume more of it.

These basic economic lessons that destroy the entire concept of the billions of dollars we spend on supply-side drug war were almost perfectly demonstrated in two unrelated articles recently.

bullet image Mysterious Blight Destroys Afghan Poppy Harvest

Up to one-third of Afghanistan’s poppy harvest this spring has been destroyed by a mysterious disease, according to estimates revealed Wednesday by United Nations officials, potentially complicating the American and NATO military offensives this summer in the country’s opium-producing heartland. […]

Besides fueling the propaganda war, the blight might also help the insurgency by giving prices a boost. Reduced production is causing prices for fresh opium to soar as much as 60 percent, after years of declining prices, according to the executive director of the United Nations Office on Drugs and Crime, Antonio Maria Costa.

While there is no evidence that the disease will return next year, the rising prices may make it harder to persuade farmers to give up the crop, he said.

The price increase is also raising by hundreds of millions of dollars the value of opium stockpiles held by traffickers and insurgents. The opium trade is believed to provide the Taliban with a large portion of their budget. […]

While farmers were suffering, [Costa] said that if the increased prices persisted, they would deliver “a very significant windfall” for drug barons and insurgents who control thousands of tons of opium stored in Afghanistan and other locations.

Yes, even the head of the UNODC recognizes that even a “naturally-occurring” temporary reduction in supply does no good, because it encourages more producers to enter the market and makes the black market more profitable for the criminals who control it.

And yet, the US is spending 2/3 of its drug war budget on supply-side efforts.

… and on the other side of the drug war economics lesson…

bullet image Plummeting Marijuana Prices Create A Panic In California by Michael Montgomery at NPR

The war on drugs and frequent raids by federal drug agents have helped support the local economy — keeping prices for street sales of pot high and keeping profits rich.

But high times are changing. Legal pot, under the guise of the California’s medical marijuana laws, has spurred a rush of new competition. As a result, the wholesale price of pot grown in these areas is plunging. […]

Mendocino County Sheriff Tom Allman says some growers can’t get rid of their processed pot at any price.

“We arrested a man who had … 800 pounds of processed,” Allman says. “Eight hundred pounds of processed. And we asked him: ‘What are you going to do with 800 pounds of processed?’ And he said, ‘I don’t know.'” […]

“What’s happening is the people that don’t have quality product aren’t selling it,” Blake says. “So they’re the ones that are creating this panic. So it really comes back down to that, just like in every other agricultural industry. When you get too many vineyards and too many people growing vines out there, then only the good ones make it.”

And now you know more about economics than our government.

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15 comments to The economics of drug supply

  • Emma

    UN, Bulletin on Narcotics, 1966 Issue 1, Twenty Years of Narcotics Control Under the United Nations:

    “(…) But it might be argued that with all these measures drug addiction continues, which means that the effort to prevent the drug from reaching the addict cannot be wholly successful; it is an unfortunate but general experience that, if there is a market, there is a trafficker to bring the goods to it. This does not mean that the efforts of governments and of the international community have been in any way wasted: drug addiction has been reduced, or at least contained, in many parts of the world, and without the control measures, there is little doubt that it would have reached infinitely higher proportions.”

    “(…) By now the problems have been clearly defined and some of them have been solved, or the instruments of their solution have been created: non-medical consumption of opium, coca leaf, cannabis, and of the drugs manufactured from them is outlawed in principle and is bound to disappear after transitional periods of adaptation; production of raw materials and of final products has been placed under control. World co-operation is at work to fight the illicit traffic and to help new countries or older ones, beset with difficult problems, to find a solution. The work goes on, and it is to be hoped with the same success as before. In the words of the Secretary-General of the United Nations, written for the first issue of the Bulletin on Narcotics, “This international control and the treaties on which it is based have… a wider significance than the limited field of narcotic drugs. If the principles on which these treaties and this control rest could be applied with equal success to wider fields of human endeavour, to other kinds of dangerous weapons, peace would be within our reach“.”

  • Bruce

    Cap’n! Come have a look at this!
    What is it Scotty?
    HAHAHHHAHAHAHA
    HAHAHAHAHAHAHA
    BWAHAHAHAHAHAHA

  • Nick z

    Mendocino County Sheriff Tom Allman says some growers can’t get rid of their processed pot at any price.

    Bullshit!! All of that pot could be sold on a legal market if the damn fascists would allow it!!

    Man, to think that I suffer most of my damn year without the stuff while this kind of pot is going wasted on the other side of the country!!

  • claygooding

    LOL. Who woulda thunk it.

  • kant

    But pete you’re forgetting one important fact. It’s the reason these tactics are necessary and it’s the reason these tactics will work. The reason is “drugs are bad mmm’kay”

  • claygooding

    Check this one out Pete:
    Link

  • chandler

    superybly written article. great job

  • primus

    On the situation in Afghanistan; could it be that the Taliban infested the poppy crop with fungus to increase the value of their stashes and also make more farmers indebted to them? Too Machiavellian? The fellow with 800 pounds processed lacked the ambition to turn it all into bubble hash, which would have found a ready market.

  • primus

    It would also help the Taliban cause if they could blame the invaders for the fungus.

  • @ primus… fusarium? Doubtful, but was my first reaction to that story as well. The Russkies were working on fusarium at their Vavilov Center at one point… (interesting disconnect there, considering who Vavilov was and the work he accomplished). Rumors also suspected US covert tests in Peru. As far as I know only US sites for fusarium testing is/was in Hawaii and Montana. A long way from Afghanistan… but the Roossians are much closer… and they might feel they owe the Afghans… hmmm…

    Oh, and former Florida drug czar Jim McDonough wanted to use fusarium on Florida’s gorilla gardens in the Everglades (2003… I think).

  • claygooding

    Primus,the Taliban is VERY anti-drug,they shut down the opium production in Afghanistan and it is rumored that the reason we went too war against them is because of that,as much as hunting Bin Laden. For them too now be connected with the opium crop would be a complete reversal of their beliefs. It is very hard to change Islamic religious beliefs,and since our history of wars has always been about protecting some rich investors money,I have too take anything our government says about the Taliban being in the opium trade with a grain of salt and a wink and a nod.

  • claygooding, morality for some is always bound to be subject to the Law of Convenience. It’s easy for a Taliban (or ot her religious fanatics) to justify this: we aren’t selling to believers, but to heathens who don’t believe and obey anyway. Their vices will weaken their opposition to us. This raises money for our cause, and as soon as we win, we’ll go ahead and abolish this for everybody. We didn’t start this, but we need the farmers to stay on our good side, and if they didn’t have some income, they would rat on us for pay. Whatever it takes, whatever it takes.

  • claygooding

    What ever it takes is the very premise of the congressional mandate from congress to the ONDCP to keep marijuana and all schedule one drugs illegal,so I guess if our government is willing to mandate a policy which requires the ONDCP to purchase false science and lie to the American citizens,the Taliban could take the same tack.

  • claygooding

    Our next test of the congressional mandate is coming at us
    in November,when CA votes on legalization. How far will the ONDCP go too follow that mandate? Anything necessary covers a lot of possibilities.