Supply and Demand: Illicit Drug Market - Research Paper Example

I. Introduction It is a fact that there are political, social, and economic dimensions to the illegal drugs trade, together with the widely recognised medical, ethical and cultural factors. It as well emphasised that for a number of the illegal drug producing countries the economic and political implications of a too-drastic reduction of production could result into internal destabilisation. Nevertheless, the application of economics and economic assumption to elaborate on illegal drugs trade presents an alternative perspective: one that perceives illegal drugs just like any other exchangeable commodity. Consequently, this facilitates the application of economic premise as an alternative policy framework (Barton 2003). This essay builds upon that insight. Illegal drugs are depraved of any moral substance and treated merely as a commodity to be exchanged, and hence subject to the rules of economics, specifically the law of supply and demand. The development and manufacture of drugs have turned out to be a significant and at times fundamental part of several nations’ economic program for development. Ruggerio and South (1995) promote this viewpoint and maintain that illegal drugs should be perceived basically as commodities. If this framework is espoused, and there appears to be hardly any good justifications why it should not be, there is a necessity to explore the character of market-based relationships that encompass drug users. The commonsensical consequence of this is that the market processes, particularly the laws of supply and demand, possesses the potential to regulate the illegal drugs trade. Prior to entering into the dimension of market and economics, it is possibly essential to take into account why there is necessity to examine this particular factor of the domain of illegal drugs. Generally speaking, there are two policy frameworks in response to the development of illegal drug use. First is harm reduction, which is addressed extensively elsewhere. The second can be referred to as the demand reduction framework. Basically, this framework is intended at lessening the use of drugs through pushing up the cost of drug use to an intolerably elevated level (Kopp 2003). The concept of cost here can indicate either the drugs’ monetary value or link to non-monetary costs such as the assurance of a prison sentence for individuals caught involved in illegal drugs trade, or put emphasis on the impairment drugs can do to the health of the user. If this is assumed as a determinant of a course of action, it can be asserted that effective prevention will push the price of drugs to levels exceeding that which people could anticipate if the same drug were officially permitted. Furthermore, if we insert into the strategy of forceful enforcement of procedures to regulate the illegal drugs trade, which would involve capture of imports, in addition to high profile policing of traders and users, people should witness the rising of cost at a tolerable level. This elevated price, in terms of monetary and non-monetary should result in a decline in demand, supply, and finally, use (Kopp 2003). If people perceive illegal drugs as a commodity it permits individuals to match up their value to other exchangeable commodities. Meanwhile, the costly nature of illegal drugs implies that they stand for a sizeable portion of the income of the users, unless the user is well-off. Hence cost, previously high, may influence demand if prices increase above a particular level. This directs us unavoidably toward the economic premises of supply and demand as well as the price elasticity of demand. II. Supply and Demand As this essay is not being written by a professional economist, it is, nevertheless, important that these two fairly direct economic premises are elaborated so that the reader can make logic of their possible relevance to the illegal drugs trade. With that in mind, the subsequent discussions will present a noticeably simple overview of the laws of supply and demand as well as price elasticity of demand. Illegal drugs are commodities; specifically, they are merchandises that can be traded for other goods or, as is more probable in our entrepreneurial economy, for monetary gains. As such they will possess a value and a price (Barton 2003). From the beginning, it is essential to emphasise that value and price cannot be interchanged. Fuller (1990) emphasises that values are one-sided elements, with a number of people valuing products far more than other people may. Harvey (1998) clarifies that individuals always desire or want something. The concept of want is fundamental in economics only when an individual is ready to sacrifice something so as to satisfy it. As the intensity of the various wants differs, so will the extents which individuals are eager to give up. In other words, various goods have a distinctive value to them. Value is appraised in relation to opportunity cost (Harvey 1998). For our objectives, we can conceptualise value and opportunity cost in this manner. A leisure drug user may fancy buying some amphetamine so as to be present at an all night party at a club. The value of that particular amphetamine is appraised at what that individual is ready to renounce, or the opportunity cost, so as to buy the drug. In this case, it may be four hours value of pay, in addition to the possibility of a criminal record if unfortunately they are discovered in possession of an illegal substance. In order to get that merchandise, the drug user will have to trade something with the dealer. In highly industrialised western countries such as the United Kingdom, people are inclined to apply what is in economic notion a means of exchange, more commonly referred to as money, to make the trade possible. Therefore, the value of the product is stated in terms of monetary value (Kopp 2003). In this manner, we are able to appraise the market value of the product through looking at its price. Hence, for Harvey a description of price becomes “the value of a commodity or service measured in terms of the standard monetary unit” (Harvey 1998, 27). The buyer afterwards make a decision whether the cost, or the monetary value they have to give up so as to get what they want, plus the potential of a criminal record, plus probable harmful effects to health, merits the value they give on the product (Harvey 1998). These transactions occur in what economists refer to as the ‘market’. The market is a basic concept in the field of economics for, through examining the fluctuations in price that transpire in a market, markets are given the opportunity to supply signals regarding what people want and what they are willing to give up in order to get what they want. Once again, it is essential to visualise the market in hypothetical terms in which the market is not a recognised structure but every buyer and seller of a product who affect its price (Fuller 1990, 83). Harvey (1998) as well emphasises that within markets the price of a product has a tendency to become identical across the entire array of buyers and sellers, hence instituting a market price. Markets are established as a satisfaction of the demand and that demand is fulfilled by the supply of a product or service. The two notions of demand and supply are essential fragments of economic theory and are, as claimed by some economists, subject to laws establish their responses upon each other. Examining first the demand, it is significant to emphasise that economics is concerned with successful demand. This implies the amount individuals are capable to pay for and eager to give up at each price (Harvey 1998). Figure 1. A market demand curve For instance, a drug user may fancy buying some heroin but is incapable to pay for it. Hence the want is not a successful demand as they are incapable or reluctant to pay for at the present price. This implies that there is a correlation between demand and price, and economists more often than not portray this through graphs. Figure 1 is a graph that demonstrates quite obviously that as price increases so demand decreases. At this point the suggestion for drug policy should be coming out; an increase in the price of illegal drugs should, as economic theory states at least, result to the decrease in demand. Looking at supply, this is assumed to imply the “the quantity a producer is prepared to put onto the market at a particular price during a particular time period” (Fuller 1990, 38). Supply is established by cost and the illegal drugs trade has a number of remarkable costs affixed to it, some monetary while others are not. Costs have a tendency to increase as supply is boosted for various reasons, including the increase in the rate of employment, more expended on packaging and others. Once costs have increased to a level further than which the manufacturer senses is tolerable, the manufacturer will abandon the market and stop trading in that specific good (Fuller 1990). Therefore, the economic law of supply expresses that an increased quantity of products will be supplied at a higher price than at a lower price. Once again, this can be stated using graphs. Figure 2. Supply and Demand Curve Figure 2 shows that by merging the law of supply and the law of demand, it is probable to measure the equilibrium price, which is the letter E point in the graph where the two lines intersect and stand for the market price. By the same argument, it is as well possible to observe other features of the market correlations. For instance, if demand is static while supply fluctuates or falls, then prices will increase, with the contrary being true (Barton 2003). Once again, this has repercussions for the illegal drug market. For instance, if a crop abolition project trimmed down the supply of amphetamine into the UK, yet demand was static, the price of amphetamine would rise. Nevertheless, if the state could generate circumstances in which the price of an illegal drug increases, economic premise reminds us that demand will decline as a progressively more soon-to-be consumers come to a decision that the price is higher than the opportunity cost or value. Evenly, if the production costs of the supplier increases above a specified level, then the supplier will abandon the market (Barton 2003). The increase in cost for the produce and the consumer could be whatever thing from an increase in the actual price to a boost in policing, the assurance of a prison sentence if unluckily caught, compulsory drug screening of inmates, loss of jobs and others. Hence, economic theory would appear to advocate a policy of guaranteeing the cost of drug use, both in relation to price and production costs, continues as high as feasible. There is, nonetheless, one more economic premise that has to be taken into account, which is the theory of price elasticity of demand. This indicates the sensitivity of demand to price. For a number of products and for a number of consumers there is a well-built level of price elasticity. This is assumed to imply that consumers are highly sensitive to price fluctuations and will change their purchasing pattern as immediately as the price rises (Kopp 2003). The opposite end is wherein demand is elastic. This indicates that consumers will keep on demanding a product regardless of the price increase. Fuller (1990) presents four determinants of price elasticity, namely, “the number and closeness of substitutes, the proportion of income the good accounts for, whether the good is a necessity or a luxury, and the influence of habit” (Fuller 1990, 59). It should be apparent that determinants 1 and 4 have significance when talking about illegal consumption. To put it concisely, it is possible to argue that there is a correlation between demand and supply. In majority of cases, economic theory determines that as price increases so demand will decrease. Economic theory as well informs us that costs increase as production increases. Nonetheless, if one or all of four determinants of price elasticity of demand are existent it may be the instance that demands continues to be stable among particular consumer groups in spite of price increases. These frameworks have evident repercussions for illegal drug policy and employing economic evaluation to policy presents an interesting, alternative perspective of the illegal drug scenario. II. Economics of Prohibition Illegal drug use entails sizeable costs on the individual users as well on the larger society. These costs include higher crime rate, health difficulties, and employment dilemmas. Due to these significant costs, government, at every level, has given top priority to drug regulation. In exploring the impact of government regulation programs, economists have employed the traditional supply and demand framework to illegal drugs trade. Drug programs such as prohibition and drug punishments are believed to cut down supply and elevate equilibrium price. Other policy alternatives such as a number of kinds of drug legalisation could raise supply and lessen equilibrium price. The impact of these policies on equilibrium mass is reliant on the elasticity of demand and on the shifting of demand. Because trivially is known regarding the elasticities of drug price, the possible impacts of different drug regulation policies continue to be a tentative exercise (Miron & Zwiebel 1995). If the goal of economic effectiveness appears too restraining for policymakers and the larger society, it is still probable to settle on another direction. The applicability of normative analysis however continues to be perfectly unbroken since it represents a kind of witness emphasising the social cost of a decision. Unluckily, a quick review of the available literature reveals that even though general normative analysis is good for examining the insignificant effects of drug policy, it is unable of evidently suggesting which of the two primary systems of drug policy, namely, prohibition or legalisation, should be given primacy (Kopp 2003). The school of thought referred to as ‘law and economics’ introduced by Coase (1937) provides a fascinating paradigm that deviates from conventional normative analysis. Essentially, it specifies that criminal law prohibits businesses that put the inalienability of rights into debate. Businesses such as drug dealings or the selling of human organs are extremely awful that they are never Pareto, or improving, since they upset most individuals more than they advance the welfare of parties who get involve in them. Hence, criminal law can be regarded a transaction cost which level is intentionally set extremely high so as to remove particular dealings such as the drug trade, and not merely to guarantee that these transactions are carried out professionally (Ruggerio & South 1995, 66). Criminal law, thus, manifests the concept that if particular dealings are unpleasant, then the transactions put forth by Coase (1937) to obtain the objectivity of those who think they are offended are similarly offensive. The ‘law and economics’ framework hence results into the clear-cut conclusion that the solution to the decision between prohibition and legalisation is in the disposal of the public: as long as majority of them negatively perceive drug use, prohibition will continue to be the most commendable system (Ruggerio & South 1995). The argument of North (1990) permits people to understand more why, for instance, the cannabis system is critically debated, at least in parts of Europe, where everything directs to the assumption that the externalities created by the execution of the law are advanced to those experienced by those who negatively label consumption. The ‘law and economics’ framework is, nevertheless, not completely sufficient as it robs economic analysis of any analytical possibility. Ultimately, we will see that regrettably we should satisfy ourselves with questioning economists to review the insignificant changes of public regulation rather than revolutionary reform. The cases of alcohol prohibition highlight the difficulties of anticipating how individuals respond to an amendment in the legal category of drugs. Through prohibiting the consumption and exchange of drugs, banning triggers an illegal industry whose equilibrium varies from that seen in legal dealings. Let us assume as a starting point a circumstance in which drug is seen as a legal good not subject to any specified taxation policies. In principle, drug banning brings about disarticulation of the supply curve increasing under the influence of the tax that banning enforces. If repression is intended against users, the demand curve is disoriented downward due to the impact of repression (Barton 2003). It is not even required that this be escorted by use repression. The prohibition alone negatively labels those who continue consumption. This negative label is economically recognised as an increase in the cost of consumption, which gives details on the downward movement of the curve (Barton 2003). Figure 3. Prohibition Effects on the Drug Market In Figure 3 the equilibrium prior to the drug ban is distinguished by a price P1 higher than subsequent to the ban P2 and a quantity of drug traded on the market q1 higher than q2. In any instance the magnitude of the drop in quantity of drug traded relies on the magnitude of the movement patterns of these two curves (Miron & Zwiebel 1995, 178). If one takes into account that repression influences suppliers of drug more severely than consumers, then the disorientation of the demand curve is more insignificant than that of the supply curve. Actually, it is not merely whether implementation against suppliers is stricter than against consumers, but as well on the manner elastic demand and supply are to be related to legal possibilities. A provided implementation level against users can have much more of an impact than the similar level intended at suppliers. Except if the demand is evidently less elastic compared to supply, the price of drug increases and the demand for drugs decreases with prohibition. Hence, the extent of price elasticity of demand on drug comprises one of the limits around which the debate of final values of prohibition is systematised. Even though plentiful empirical researchers are is available, most particularly, Grossman and Chaloupka (1998) claim that the price of drug demand is quite elastic, whereas Miron and Zwiebel (1995) think that the fragile demand elasticity to prices and the “banalization of drugs would pull the demand curve down” (Miron & Zwiebel 1995,179) creating, in the instance of drug legalisation, a sudden increase in consumption unusual. Figure 4. Prohibition with Inelastic Demand In Figure 4, a preliminary equilibrium on the drug industry is set for a quantity of drugs traded q1 and a price P1. Banning of drugs disorients the supply curve S1 to S2. Hence, a new equilibrium is obtained for a quantity of drugs supplied similar to the cases existing prior to prohibition but a higher price p2. Hence, as was the instance with alcohol throughout prohibition, banning would make drugs appealing, specifically for young individuals aiming to dissent against the social order. The constructive effect of a decrease in price on consumption and the off-putting effect of the removal of the exposure of prohibition should cancel each other out (Miron & Zwiebel 1995, 179-180). III. Conclusions We conclude this discussion of the fine groundwork on the prohibition of drugs with a sense of confusion. The traditional normative framework presents a number of exceptional tools for a discussion of the insignificant disparities of a public drug regulation. It is unworkable, on the contrary, to apply this body of tools effectively to examine the intricacy of the relations between the various effects, hence the improbability of coming up with a conclusion as to the dominance of the prohibition framework or the legalisation approach. We experience similar discontent, to a lesser degree, in relation to law and economics. Coming out from this school of thought is the notion that prohibition of drugs has an economic basis only if the laws are not the focus of considerable offenses. Ultimately, the laws should adjust to the viewpoint of drugs embraced by the people who make up the larger society. As long as this viewpoint is dominantly unconstructive, prohibiting drugs facilitates the defence of users from themselves, which leads to proclaiming the human body immutable by the determination of the one who occupies it. Hence, where drugs are the issue, everything depends on the social agreement, an agreement that is erratic and indefinable. The policy maker can assign a more or less substantial amount to suppression to prevention in the drug industry. But he is risking a lot, just like gambling. Once the sum of public spending has been established, he knows that relying on the manner it is partitioned among the big organisations and the mechanisms of implementation adopted, the impacts on the level of drugs in the market will differ. The proposal of lessening activities in the illegal drug market to its most favourable level entails crucial problems of putting into effect that do not permit an accurate definition of the agenda of public regulations essential to carry out the normative goal of efficiency. By the way, the core idea that the search for shared welfare can be solely carried out through reaching a specified level of drug use or of crime becomes a particularly crude approach to the difficulties created by drugs to society, for the reason that a similar level of use or consumption or of transgression can be escorted by various degrees of social cost. Despite of the constraints, the instruments for normative economic framework still become to be exceptionally valuable to portray the relationship between agent conduct in the drug industry and their context, specifically in relation to price and rewards offered by the law and its enforcement. Various components should still be enhanced so as to make economics a genuinely functional instrument as far as public regulation decisions are concerned. We will try to approach this path through more tangibly reviewing the policies in fact implemented in the field of drugs. References Books Barton, A. (2003), Illicit Drugs: Use and Control, New York: Routledge. Fuller, N. (1990), Fundamental Economics, Seven Oaks: Tudor Publishing. Harvey, J. (1998), Intermediate Economics, London: Blackwell. Kopp, P. (2003), The Political Economy of Illegal Drugs, New York: Routledge . North, D. (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Ruggerio, V. & South, N. (1995), Eurodrugs: Drug Use, Markets and Trafficking in Europe, London: UCL Press. Journal Articles Coase, R. (1937), The Nature of the Firm, Economica , 386-405. Grossman, M. & Chaloupka, F.J. (1998), The Demand for Cocaine by Young Adults: A Rational Addiction Approach, Journal of Health Economics , 427-474. Miron, J. & Zwiebel, J. (1995), The Economic Case Against Drug Prohibition, Journal of Economic Perspective , 175-192. Read More