Economic Principles in Understand the Operation of Illicit Drug Markets - Research Paper Example

 To What Extent can Economic Principles be used to help us understand the Operation of Illicit Drug Markets and the Role of Organized Criminals in their Formation? Introduction Economics can be defined as the study of scarcity and how to allocate the limited resources and make sure that they are utilized maximumlly (Becker 1992). Economic principles therefore, are guidelines on how the economy works. Principles of economics can also be defined as methods or guidelines that economists use when dealing with economic issues. The illicit drug market is said to be one of the biggest markets globally (Wilson, L. n.d.) The reason for this is that the drug market generates huge profits that are not available in other markets, be it legitimate or criminal related (Caulkins and Reuter 2004). According to statistics, illicit drug markets are more profitable especially if the drugs have to be distributed internationally (Caulkins and Reuter 2004). The drug market is very large because the chain of people involved in the trade is very long, starting right from the rural areas to the urban cities. The chain has got wholesalers, retailers, and distributors, where each of them has a major role to play in the trade (Wilson, L. n.d 2004) Organized crime has got a major role in the drug market. Its main responsibility is to provide protection rights for their property in the illegal market by use of violence. Organized crime is also supposed to protect its interests in the market by trying to reduce the influence of competitors as well as opposing bodies that pose as obstacle in the market such as the police body (Becker 1992). Organized crime groups also have the role to distribute the substance to high risk areas since they have all the mechanism needed to ensure that the substances get to their destinations as required. These organized crime groups can also work in collaboration with law enforcement bodies such as the police (Albertson 2011). Such links are meant to avoid chances where the police will interfere with activities in the illicit or black market. This paper will look at how the three aspects, economics, illicit drug markets and organized crime are interrelated, and how the drug market depends on the other two to ensure is survives in the market. Literature Review a) To What Extent Economic Principles Can Be Used To Help Us Understand The Operation Of Illicit Drug Markets? Economic principles are applied in businesses to help make decisions and to make sure that the business is able to continue making profits despite the circumstances or business environment. The very economic principles are also applied in the illicit drug market since the market is also a business, only that it is an illegal business (Becker, Gary, and Kevin 1988). Economic principles have in a large way influenced the prices and activities of the illicit market. To start with, illicit drug markets apply the economic principles even at the earliest stages of formation or operation. Principles of economics apply to all businesses as rational agents (Becker, Gary, and Kevin 1988). The principles help weigh the costs and the benefits of each business activity. For this reason, all businesses, drug markets not being an exemption, put into practice the principles of economics so as to ensure that profits are realized at each point of the chain (Caulkins and Reuter 2004). The rationality approach is based on cost-benefit paradigm against addiction to the substances. Addiction can be defined as a habit. Most drug users have become hooked to or addicted to drugs and will not function normally unless under the influence of drugs (Becker 1992). An addiction comes after prolonged use of the drug substances and so, not all drug users are addicts. Users that are not yet addicted to drugs try to create a balance between having fun today and not forgetting about the future (Becker, Gary, and Kevin 1988). One of the consequences of using drugs is that one loses focus in life making their future very uncertain. Unaddicted users are therefore able to escape most of the consequences of drug abuse by limiting their usage of the substances. For those who are already addicted to the substances, they tend to lead very uncertain lives (Becker, Gary, and Kevin 1988). However, this does not mean that they do not mind about the future, only that they think of the future in terms of how they are going to acquire more drugs and at what price the drugs are going to be sold at. If the price of a drug increases, then the demand may reduce and vice versa (Becker 1992). This rational addiction paradigm is also used to explain why many efforts to treat drug addicts have failed (Becker, Gary, and Kevin 1988). If the prices of the drugs increase to a point where the user cannot afford to buy them, then they will reconsider the costs against the present benefits and the chances of them quitting without any form of treatment are very high. On the other hand, trying to treat a drug addict while they still view the costs of the drugs as matching the present benefits can be very difficult (Becker, Gary, and Kevin 1988). It is more probable that to their addiction, sooner or later, till they realize that the costs of the substances exceed the benefits (Becker, Gary, and Kevin 1988). Opportunity costs can be defined as the costs that have to be endured or incurred when the drug enforcement efforts catch up with the drug dealers, distracting the normal running of the market (Albertson 2011). This means that when law enforcers focus on the drug market, then the profit margins get altered. Below is a diagram that explains how this opportunity costs come about. When enforcers stop focusing on other crimes and concentrate on the drug market, then the distribution of the drugs decreases, forcing the dealers to increase the prices of the drugs. efforts to reduce use of drugs B * A * Efforts to deal with other crimes According to the diagram, when the enforcers focus more on reducing the distribution of drugs than they do on other crimes, the prices of drugs move towards B. If otherwise, the prices will reduce and move towards A. Drug users will have to deal with opportunity costs which are usually higher than usual in such a situation as above. Drugs have always been sold at very high prices. However, this is not attributed to the scarcity of drugs or something related to that. Drugs have always been expensive because they are illegal substances and should not even be in the market in the first place (Shah 2008). Due to their illegality, it becomes very difficult to produce them, distribute them, and even sell them. Again, costs incurred along the chain which are all imposed on the end user of the drug substances (Shah 2008). The supply and demand analysis of drug markets is based on economic principles because demand and supply are directly linked to each other (Caulkins and Reuter 2004). If changes are made to the existing prices of the substances, there will be little or no change at all in the rate of demand. This means that an upward movement of supply leads to a downward movement of demand and this is usually inelastic, meaning, none will increase just because the other decreased or increased and vice versa. This analysis has an impact on enforcement efforts which are aimed towards reduction of supply or reduction of demand. The enforcement agencies believe that if there will be no drugs or little drugs in circulation, then the prices of the little that is available will rise (Caulkins and Reuter 2004). Law enforcement efforts geared towards reducing the supply of drugs have a severe impact on the supply curve. On the curve, the equilibrium price goes higher as the equilibrium of quantity of drugs in circulation or being sold goes down. As discussed earlier, demand and supply of drugs are inelastic, therefore what is affected is the equilibrium price which goes higher than the equilibrium quantity (Caulkins and Reuter 2004). This is well illustrated in the diagram below. S’ P’ S P D Q’ Q The diagram above shows how the prices go high, while the quantity of drugs in circulation reduces. Q stands for the initial quantity of drugs in circulation before efforts of enforces began having an impact. Q’ shows the reduced quantity. The demand (D) and supply(S AND S’) are inelastic as shown. Due to the inelasticity, the drug dealers tend to take advantage of the situation and sell the drugs at very high prices. This could work for the enforcers as many drug users will either be forced to quit or chose a type of drug that is a bit cheaper. It should therefore, be noted that drug substance do not have brands, but that there are different types of drugs. Here, the users are therefore forced to forego their preferences, and get something else that is affordable, or quit the bad habit altogether (Caulkins and Reuter 2004). Still under the analysis of supply and demand, once the enforcement efforts change the equilibrium, then the risks involved in the business increase (Caulkins and Reuter 2004). Drug dealers will therefore want to take advantage of the risky circumstances and make the most out of them. This explains why the equilibrium price goes even higher than the demand. Drug dealers will not mind meeting the extra costs to escape the measure put in place to reduce the supply of drugs (Caulkins and Reuter 2004). In the due course of compensating the risks, there are chances that the rate of other crimes will go higher. Drug addicts may turn to stealing or other criminal activities to raise finances needed to purchase the needed drugs (Becker 1992). The drug dealers may also engage in crime so that they may also raise funds to counteract the efforts of enforcers. Drug use is itself a moral hazard. This is because a person under the influence of drugs has a low thinking capacity and will act against their inner conscience, a reason why most drug users are criminals. Drug prevention can be done through programs where people can be educated about the dangers of using these substances. Several governmental and non-governmental organizations have been created to help solve this problem of drug abuse (Caulkins and Reuter 2004). Drug substances are illegal because of the negative effects they have on users (Drugs 2011). Strict restrictions and policies are therefore, imposed on the drug market, hence why it is made illegal. Therefore, for this market to run, many secret activities and huge costs are incurred while trying to escape the enforcers, explaining why the drugs become so expensive at the very end. This is different as in other markets where the policies are very friendly (Drugs 2011). The legal markets have a formal structure which makes it easy for the organization of the activities. This is not the case when it comes to illicit drug markets. It would be difficult to have structures and policies to run the market (Reuter and Stevens 2007). Externalities can be defined as a consequence situation of an activity (Reuter and Stevens 2007). Several externalities, both positive and negative, occur as a result of efforts that have been put in place to reduce the distribution of drugs. One example is possible increase of unemployment rates. Efforts to reduce the consumption and supply of drugs have led to the formulation of policies by most corporations. There are certain jobs that are very sensitive and need one to be fully alert when doing them. For this reason, corporations are forced to formulate policies of drugs tests as a way to ensure that their employees do not consume the drug substances. Those that are caught are in most cases, fired, increasing the number of unemployed people. Another externality comes about as a result of uneven enforcement policies. There are communities that set very strict policies to reduce consumption and drug trade. In such a situation, the drug dealers will move to communities where the policies are not as strict. When this happens, the enforcement agencies create even tougher policies, placing the particular community at a very tight position, to a point where even their freedoms are interfered with. Another negative externality is the increased formation of organized crime to counteract the efforts of the enforcers (Wilson n.d.). A positive externality is that drug users may quit or stop using the drugs all together because of the high prices that dealers have to charge for the drugs (Drugs 2011). S E P’ P S’ S E D Q Q’ Q The above diagram is meant to show the externalities In the diagram, supply and demand remain constant. S is used to denote the initial level of supply while S’ is used to denote the level of supply after the efforts of enforcers start having impact on the drug market. The S and S’ arrows show that the supply does not change, neither does the demand, denoted by D. Q and Q’ show the amounts of drugs in circulation. According to the graph, when the enforcers are less focused on the drug market, then the quantity of drugs in circulation is much higher and at a lower price, P. The price increases when the efforts intensify, P’. However, the efforts of enforcers lead to externalities that intensify with according to the strictness of the efforts. This is shown by line E which gets steeper when the efforts intensify. When a comparison is made between the drug market and the cigarette market, it becomes evident that the cigarette market goes through fewer restrictions because cigarettes are not considered as illegal drugs (“Size of the Drug Market” n.d.). Cigarettes and drugs are both very addictive, and should be both restricted equally. This explains why cigarettes cheaper and affordable to many people. However, certain policies are made to reduce the consumption of the cigarettes since they too have a number of negative effects on the user. These restrictions tend to raise the costs in a way and so, in a few cases, organized crime is used to smuggle and distribute the cigarettes (“Size of the Drug Market” n.d.). The increased prices have led to an externality. The externality in this case is the formation of organized crime to smuggle the cigarettes. Again, the costs are imposed on the consumer who has to pay the equilibrium costs and any other cost included (Drugs 2011). Criminal gangs that take part in organized crime come in handy because it is very difficult for illicit markets to operate without them. It is impossible to meet the needs of an illicit market without having a form of organization, where in this case, due to the illegalities, organized crimes come in. In the drug market, it is almost impossible to find legitimate opportunities where people can work honestly. The drug trade is in itself an illegal activity and so there is no way that legitimate approaches are applied (Reuter and Stevens 2007). b) To what extent can economic principles help us in understanding the role of organized criminals in their formation? One of the economic principles that may explain the formation of organized is the economies of scale (Reuter and Stevens 2007). Under this principle, two important aspects are covered. One is the size of the drug market both in monetary terms and the amount of drugs sold. The other aspect is on costs covered in the illicit market. If the amount of drugs sold and money circulated is relatively high, then there is a great requirement of an organized group to protect the interests of those involved. Again, organized crime is needed to help reduce the costs that are incurred in the due course of making the drugs available to the consumer (Drugs 2011). Another principle that explains the formation of organized crime is the principle of the comparative static analysis (Drugs 2011). When restriction on the usage and distribution of drugs intensifies, then the supply curve tends to go up and more towards the left side, meaning that the prices increase. Organized crime is therefore formed to ensure that the distribution of drugs still goes on. Going against the activities of enforcements can be difficult and so violent actions are needed to counteract the efforts (“Crime and Justice: Drugs and Crime” n.d.). Economically, most of these activities of organized crime are formed by people from similar ethnic backgrounds (Reuter and Stevens 2007). Organized crime gangs are also formed by people who are socially close or from the same family. This is to ensure loyalty as it is easier for one to be loyal to someone they have known for a long time. It should also be noted that in these gangs, there are ranks of positions where the top posts are assigned to those who have proven capable of bringing in more gains and keeping the group together (Crime and Justice: Drugs and Crime n.d.). Those who top the drug dealing market earn very huge profits as compared to those at the low levels, such as the distributors found in the streets. This does not affect their efforts or discourage them from joining the market. The tournament theory is used to explain this. The big difference between those who top the illicit market and those at the low levels only serves as an encouraging factor to those at the bottom. This is because they know that the more efforts one puts in the business, the more gains they will have (Drugs 2011). Drug dealers enter into crime hoping that one day they will get to the top, though this hardly ever comes to pass. Finally, when governments put up posts to warn people against drugs such as marijuana only steers the criminals into much violence as they try to defend themselves from the public attack. The posts also raise curiosity in people who do not know about the substance, especially the youths. They will therefore want to experiment and once they try it out for the first time, chances are that they will get hooked to the substance. This increases market for drugs (Drugs 2011). Conclusion        The illicit drug market is evidently well established despite it being illegal. A lot has been said and done but still, the market has been able to position itself well and generate huge profits that attract people to have a role in the long chain. As discussed above, there are economic factors that have encouraged the growth of the market, making it very difficult to eradicate it or completely close it down. Among the listed economic principles, the demand and supply has contributed largely to the growth of the market. There will always be a demand for drug substances, meaning the suppliers will do their best to meet the high demand. The marketing of drugs has resulted to increased criminal activities (Drugs 2011). Looking at the issue at a shallow level, people who are addicts will do all sorts of things such as stealing and being involved in prostitution, just to make money to pay for the drugs. On the same note, when under the influence of drugs, these drug users will involve themselves in any criminal activities since one effect of drugs is that they reduce the thinking capacity of someone. There are a number of solutions to deal with the drug market. As listed above one of them is trying to reduce the market by educating people on the dangers involved with drug abuse. The governments should lay more emphasis on educating people on the dangers they expose themselves to once they get involved with drugs. This can be done through forums, workshops, media, and any other forum where people can be sensitized on the dangers of abusing drugs. It is also evident that economic principles that are applied in legal business are used in the illicit drug market. The economic principles have to a large extent contributed to the strong foundation on which the drug market is based. The principles also apply in the formation of organized crime which has now become very essential in the drug market. Reference List Albertson, K. & Fox, C. 2011. Crime and Economics. Taylor & Francis Group. [Online], Retrieved 08 December 2011 from http://books.google.com/books/about/Crime_and_Economics.html?id=aTwaQwAACAA Caulkins, JP. & Reuter, P. n.d. Towards a Harm Reduction Approach to Enforcement. Vol. 8. Print.   Caulkins, JP. & Reuter, P. 2004. “Illicit Drug Markets and Economic Irregularities,” RAND Drug Research Center. [Online], Retrieved 08 December 2011 from http://www.heinz.cmu.edu/research/261full.pdf Crime and Justice: Drugs and Crime. n.d. Directgov. [Online], Retrieved 08 December 2011 from http://www.direct.gov.uk/en/CrimeJusticeAndTheLaw/CrimePrevention/DG_181557 Drugs. 2011. Serious Organized Crime Agency. [Online] Retrieved 08 December 2011from Available at [Accessed on 01 December 2011]. 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