July 5

Of Guns and Butter: The Economics of Prohibition

Since the Harrison Act in 1914, the national policy for managing substance abuse in the United States has been prohibition. In 1970, the Controlled Substances Act began the War on Drugs, although under President Richard Nixon most of the funding went to treatment rather than enforcement. There have been many other legislative attempts to reduce drug and alcohol use in our nation. Yet despite these increasingly harsh laws, drug overdoses– an indicator of overall drug usage– have continued to skyrocket. In 1970, there were 7,101 drug overdoses. In 2020 there were over 90,000. The mortality rate from overdose has jumped from about 1 per 100,000 people in 1979 to 21.6 in 2019.

Clearly prohibition isn’t working.

Is there a better way? Consider the experience of Portugal, which has seen drug use (as measured by usage in the previous 12 months), overdose deaths, HIV, Hepatitis C, and drug-related social costs drop since decriminalizing drugs in 2001.

And yet these two very different national experiences were predictable– and should have been predicted by anyone who has studied economics.

If you’ve taken an economics class, you probably remember the “guns and butter” charts. These demonstrate that because production capacity is limited, producing more of one thing requires producing less of something else. But they also tell us something about price: If more guns are produced, the supply of butter drops and the price goes up. This makes it more profitable to produce butter– an economic opportunity. It’s also an opportunity to invent new substitutes for butter in order to fill the demand.

Now imagine we replace these two products with two others: milk and heroin. As the supply of heroin drops, the price goes up, making it more profitable to supply. And there’s incentive to find and supply substitutes, like oxycodone and fentanyl. Consider that an oxycodone bought by prescription costs about 33 cents, but on the street it sells for $20– a gross profit of 6,000%! That’s quite an incentive. As you can see, prohibition on heroin actually encourages increased supply because it becomes so much more profitable to sell.

But there are other economic behaviors that tell us prohibition should fail. For example, when something is scarce, people want it more. It becomes a status symbol. Which is more attractive to wear: a rare shirt you bought at the concert of your favorite band or a common t-shirt purchased at Walmart? Many people would choose the one that no one else has. Rarity adds value.

And prohibition removes any possibility of regulating content or safety. So long as the substance is outside governmental control, its quality relies solely on the ethics of the provider. And if the substance is illegal, the provider is by definition a criminal whose ethics are open to question. With so much money involved– and a desperate market for the product– customer satisfaction isn’t much of a concern. This is why so many overdoses are linked to adulteration. A poster in a New Hampshire hospital, above, warns that much of the heroin has been contaminated with carfentanil, an animal tranquillizer that is 10,000 times more potent than morphine. People are dying because the drug they are addicted to is illegal.

From the standpoint of economics, so long as there is a demand– for drugs or for any product– there will be a supply. The more we try to stamp out that supply, the more the price goes up and the more incentive there is to provide the product. We cannot reduce demand by reducing supply. That’s not how economics works.

On the other hand, when something is readily available, in the absence of other factors like billion-dollar marketing campaigns, it becomes less appealing.

There are, of course, many other factors driving the addiction crisis in this country. But so long as the substances are illegal, we have virtually no way to control the social cost of this epidemic, nor to limit the tragic loss of life.

Copyright 2019. All rights reserved.

Posted July 5, 2021 by mitchmaitree in category "Addiction", "Economy

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