Law and Economics Classics - Prohibition
At Grove City College, I teach Law and Economics--a course that explicitly examines how "people expand their options by cooperating." It therefore lies at the heart of "mere economics." In this sermon series, I'll be posting a summary of classic L&E papers over the coming weeks.
Miron, Jeffrey A., and Jeffrey Zwiebel. "The economic case against drug prohibition." Journal of Economic Perspectives 9, no. 4 (1995): 175-192.
Since drug use is clearly destructive, many well-meaning people have advocated for government prohibition of production, sale, and consumption of drugs. A large number of economists have suggested, however, that many of the ills associated with drugs are actually a function of prohibition, rather than the drugs themselves. This paper argues for that position. The most direct effect of prohibition is a leftward shift of the supply curve for drugs. It likely does the same thing for the demand curve due to penalties for consuming drugs, but the shift is likely less than the supply curve because (among other reasons) penalties are almost always more severe for suppliers than demanders. Prices rise and equilibrium consumption falls. Prohibition lowers the marginal cost and raises the marginal benefit of violence because participants cannot rely on legal system and also because, as criminals, the opportunity cost of violent acts is lower. (One might reasonably question Miron and Zwiebel’s position that inability to rely on the formal legal system increases violence, since there are many cases of parties voluntarily opting out of the legal system to rely on other means of dispute resolution). The view is that prohibition, not consumption, increases violence. Under alcohol prohibition, the murder rate spiked.
There are several reasons why underground industries are easily cartelized. Among them, the MC of using violence to enforce the cartel is lower. This same reason means it’s harder for small entrants to compete (not true in legal markets). Cartelization prevents dissipation of profits, which reduces the MC of violence further, since there’s a larger prize to be had. It also provides real resources with which to bribe police. Prohibition leads to increased uncertainty about product quality, since buyers can’t complain about product quality without incriminating themselves. The result is more accidental overdoses/poisonings. Accidental over-doses are also more likely due to the Allen-Alchian effect. This was observed empirically during alcohol prohibition. There is an increase of property crime under prohibition, which the authors attribute to the inelastic demand for drugs (people are finding alternative ways to acquire income). Since prices are artificially high, this effect is exacerbated.
The paper also conducts a “normative analysis” of prohibition in which they argue against the common views that drug users are uninformed and the view that all drugs are highly addictive. They also argue that the negative health consequences of drugs have been overstated. Next, they tackle the objection that consumption generates negative externalities. First, they point out that prohibition might incent shifting to substitutes (alcohol, tobacco). Second, enforcement is targeted more at light users, but externalities are important for heavy users. Lastly, they do a historical tour of Prohibition. Prior to drug criminalization, they point out the US was “not a country of drug addicts.”
Image from Mark Thornton’s The Economics of Prohibition:
