The Economic Theory of Illegal Goods: The Case of Drugs

The Economic Theory of Illegal Goods: The Case of Drugs,Gary S. Becker,Kevin M. Murphy,Michael Grossman

The Economic Theory of Illegal Goods: The Case of Drugs   (Citations: 12)
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This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs.<br><br>Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at <a href="http://www.&#110;;10976" TARGET="_blank"></a><br>
Published in 2004.
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    • ...increase the profitability of the drug business and thus they tend to attract many new agents seeking to capture the enlarged profit opportunities (see Becker et al(2004))12...
    • ...12 Becker et al. (2004) show that if the demand of illicit drugs is relatively inelastic, interdiction and...

    Cláudia Costa Stortiet al. Globalization and the Price Decline of Illicit Drugs

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