Cost-benefit analysis of drug policy

Here is why I love the economic analysis of policy. It’s an article by Mark A. R. Kleiman, detailing some simple rule changes and common sense redistributions of law enforcement budgets in order to maximize the efficiency and fairness of our drug enforcement policy. Imagine if we asked the DEA, the FBI, and the Army units assigned to Plan Colombia to detail the ‘market failures’ that have lead to the need for burgeoning prison populations, paramilitary SWAT teams invading American homes, or military participation in Colombia’s civil war: clearly, the supply of drugs has recently outstripped the supply by a large margin, since “prices of cocaine and heroin have fallen by more than 80 percent [since 1980.]”

There is much evidence to suggest that this is due to the ‘balloon effect‘: prices fall when enforcement increases because the demand from hard-core drug users is inelastic: they’ll want roughly the same quantity at a wide range of prices, but this willingness to pay more encourages more suppliers to enter the market. Squeeze in Colombia, and supply increases in Afghanistan… while suppliers in the US and other places with tough enforcement policies innovate desperately to get back into the market, coming up with new business models, new production methods, and escalating the violence they’ll endure to increase their market share. All this desperation leads to increased capacity, which drives prices down, and so we’re left with drug dealers making less than minimum wage!

So forget market failure… as I pointed out yesterday, it’s an absurd prerequisite for regulation. Perhaps we’d simply like to reduce the social ills attendant to drug use and drug dealing. If so, Kleiman has some great suggestions, summarized below the cut.

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