an economic analysis of the illicit drug market
TRANSCRIPT
The International Journal of the Addictions, 18(5), 681-700, 1983
An Economic Analysis of the Illicit Drug Market
Godwin Bernard,* MS
Department of Sociology Graduate School and University Center of the City of New York New York, New York 10036
Abstract
Analyses of heroin addiction have often focused on its relationship to crime. It is assumed that with an increase in price, the addict who has a dependence must commit crime to support his habit. The present analysis proposes a new and critical approach to the problem based upon Consumer Behavior Analysis. It identifies the variables of Com- plements and Substitutes, and their effects upon price, supply and demand, criminality, and possible implementation of treatment modalities .
SUPPLY AND DEMAND FACTORS IN THE DRUG MARKET
Although drug addiction, especially addiction to heroin, has become one of the most perplexing of urban social problems, surprisingly little research has been done in terms of the relationship between price changes and supply and demand effectuated through a market mechanism, even if in an illicit market. Most analyses of illicit drug use have been undertaken from the point of view of social deviancy, urban decay and pathology, family breakdown, crime, and SO forth. These viewpoints are basically those of sociologists. Fewer economists still have taken notice, much less deemed the problem worthy of economic
*Address correspondence to the author at 80 Hancock Street, Brooklyn, New York 11216.
681
Copyright 0 1983 by Marcei Dekker, Inc. 0020-773)3/8 3/1805 -068 1 $ 3 -5 O/O
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682 BERNARD
analysis. In the few examples of economic analyses of heroin addiction, this has meant primarily detailing the route of the international traffic and distribution, evasion of law enforcement monitoring, the vitiation or cutting of the substance to increase its street value, and estimation of “monopoly” practices which might be mgaged in by the suppliers (Hamilton, 1972, p. 409; Holahan, 1972, p. 299; Preble and Casey, 1969, pp. 1-24).
In another economic analysis (Koch and Grupp, 1971) which focuses on the addict’s demand for heroin as a consumer, the unchallenged axiom is that the addict has a permanent physiological dependence upon heroin. Consequently, once a user becomes addicted to heroin, he must maintain tolerance -the increase in dosage needed to achieve a desired effect-or face the often painful and hazardous effects, including death, of withdrawal or the absence of heroin in his physical system. In such a situation, this analysis assumes, the addict’s demand for heroin will tend to be highly inelastic. Inelastic means that regard- less of the increase in the price of the fixed dosage unit, the addict will still maintain the demand for heroin that relates to his tolerance. Graphically, this situation of inelasticity would appear as shown in Fig. 1. This is the traditional analysis by students of heroin addiction. In such a situation, price increases will have to be met by the addict through increased criminality, prostitution, etc. But this analysis is too static, analyzing what may be no more than a temporary, short-run situation as if it were a permanent, long-run situation. By incorporating Consumer Behavior Analysis into this exposition. I intend to show that insofar as there are substitutes for the preferred drug (heroin) used by the addict, and other things being equal-identical quality and price by all sellers- the addicted consumer will demonstrate the same observable behavior to price changes as the general consumer of any other (licit) good would to changes in price. (See Table 1 for a list of relevant economic studies.)
CONSUMER BEHAVIOR ANALYSIS: THE TWO-GOODS MODEL
A review of the literature has shown that most narcotic addicts are polydrug users (Wallace and Neil, 1978, p. 241; Green et al., 1978, p. 1021). Here I assume that the drug of choice is heroin ( H ) , and alternative drugs used, whether methadone or alcohol, are called D.
To begin with, there are three concepts related to substance use which must be defined: “tolerance,” the increase in dosage needed to maintain the same or a desired effect ; “habituation,” the psychological and/or emotional needs met by drug use; “dependence,” a real quantifiable syndrome caused by withdrawal from the drug. Now these concepts must be integrated into the framework of Consumer Behavior Analysis, which will be expressed in the Two-Goods Model. Habituation is here defined in terms of the economic concept of utility-some benefit, emotional or psychological, that the consumer (addict) gets from the
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ECONOMICS OF ILLICIT DRUG MARKET 683
P
- 0 4 0
Fig. 1. Infinitely elastic demand curve. P, price of good; Q, quantity of good demanded; q , actual quantity demanded and consumed by addict(s); dd, market demand curve.
use of drugs. The assumption is made that the absolute income of the addict remains fixed-it cannot be increased by any means whatsoever. This assump- tion is made because the object is t o analyze the effect of a pure substitution between the two goods, not merely change due to fluctuations in the relative prices of the two goods. By holding absolute income fixed we ensure that we rule out changes in relative prices-increases lowering real income, decreases raising real income. In terms of the Two-Goods Model, holding income fixed allows us to analyze the decision the addict will have to make concerning toler- ance. Figure 2 shows what we want to rule out.
Figure 2 represents a change in relative prices; the price of D (PO) is held constant and the price of H (pH) increases, so the result is a fall in the amount of H purchased. If one follows the analysis so far, it should be seen that the diagram does not yet incorporate any of the concepts we are interested in examining.
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Tab
le 1
Res
ourc
e L
ist
of
Eco
no
mic
Stu
dies
~~
Aut
hor
Yea
r A
ssum
ptio
ns
Subs
tnnc
e(5)
Aga
r an
d 19
75
Met
hado
ne u
se a
con
sequ
ence
of
Met
hddo
ne
Step
hens
he
avy
inul
tidr
ug u
se p
robl
em
Atk
yns
1974
A
fal
se d
icho
tom
y ex
ists
bet
wee
n M
ethe
drin
e th
e pu
sher
who
is n
ot a
n B
arbi
tura
tes
addi
ct a
nd t
he p
ushe
r w
ho is
M
ariju
ana
addi
cted
. H
ashi
sh
Opi
ates
Blu
m
Eric
k son
Ham
ilto
n
1979
H
eroi
n us
e is
not
inev
itabl
y H
eroi
n ad
dict
ive.
Mos
t pe
rson
s w
ith h
eroi
n ex
peri
ence
are
no
t add
icts
. T
here
is n
o pr
oof
that
her
oin
use
caus
es
crim
e. a
nd c
rim
inal
ity
pre-
ce
des
addi
ctio
n.
low
ers
sale
s whe
n pr
ices
ri
se.
1969
A
n el
astic
dem
and
for
hero
in
Her
oin
Her
oin
user
s
1972
T
he ro
le o
f ci
gare
tte
adve
rtis
ing
Cig
aret
tes
was
to
incr
ease
com
peti
tion
Use
rs
Find
ings
jcon
clus
ions
Out
pati
ent
met
hado
ne
mai
nten
ance
cli
ents
In
crea
sed
met
hado
ne u
se r
elat
ed t
o (1
) che
apne
ss o
f dr
ug a
nd (
2)
high
and
con
sist
ent q
uali
ty o
f m
etha
done
. 50
% of
dea
lers
dea
lt d
rugs
to
obta
in
free
sup
plie
s fo
r th
eir
own
use.
M
ost
deal
ers
ofte
n so
ld m
ore
than
one
typ
e of
dru
g an
d ha
d ty
pica
lly u
sed
drug
s bef
ore
beco
min
g de
aler
s.
Nei
ther
sup
ply
nor
dem
and
redu
c-
tion
pol
icie
s se
em t
o be
eff
ec-
tive.
Ini
tiat
e a
twof
old
poli
cy:
beef
up
patr
ols
to a
rres
t id
enti
- fi
able
her
oin
user
s; p
rovi
de
hero
in m
aint
enan
ce i
nter
ven-
ti
on.
Supp
ly r
educ
tion
pol
icie
s ca
use
grow
th o
f m
onop
olie
s by
su
pplie
rs, w
ho c
an r
aise
pri
ces.
T
his
lead
s to
incr
ease
d ad
dict
cr
imin
alit
y. B
ut t
he e
xist
ence
of
met
hado
ne m
aint
enan
ce
clin
ics c
an e
nsur
e a
mor
e el
astic
de
man
d fo
r her
oin.
B
anni
ng T
V a
ds re
duce
d co
nipe
ti-
tion
and
led
to c
arte
liza
tion
of
Subu
rban
dea
lers
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onal
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y.
for m
arke
t sh
ares
, not
to
stim
ulat
e de
man
d.
Kat
zper
, Ryb
ack,
19
78
Hea
vy u
se o
f al
coho
l an
d it
s A
lcoh
ol
Gen
eral
dri
nker
s an
d H
ertz
man
so
cial
cos
ts c
an b
e re
gula
ted;
al
coho
l con
sum
ptio
n va
ries
di
rect
ly w
ith
pric
e an
d av
ail-
abil
ity,
as w
ith
othe
r co
m-
mod
itie
s.
Koc
h an
d G
rupp
19
71
Exc
ept
for
user
pus
hers
, sup
plie
rs
Her
oin
can
be d
iffe
rent
iate
d fr
om c
on-
sum
ers.
Som
e po
licie
s af
fect
us
ers
mor
e th
an d
eale
rs; r
educ
- ti
on p
olic
y ef
fect
iven
ess
mea
- su
red
in t
wo
way
s: r
educ
tion
in
qua
ntit
y co
nsum
ed a
nd r
e-
duct
ion
in d
olla
r ex
pend
itur
e.
the
pric
e of
her
oin
and
caus
e in
crea
sed
crim
inal
ity
sinc
e th
e de
man
d fo
r he
roin
is
inel
astic
.
Koc
h an
d G
rupp
19
73
Supp
ly r
educ
tion
pol
icie
s ra
ise
Her
oin
May
nard
and
K
enna
n 19
81
Alc
ohol
abu
se is
not
just
in
divi
dual
but
incu
rs s
ocia
l co
sts
in th
e fa
mily
and
the
pr
ivat
e an
d pu
blic
sec
tors
.
Alc
ohol
the
indu
stry
sin
ce it
clo
sed
the
prin
cipa
l ch
anne
l ope
n to
riva
l pr
oduc
t pr
omot
ions
.
bran
ds t
o at
trac
t ne
w u
sers
. N
ew b
rand
s fr
om th
e sa
me
sup-
pl
ier
less
en t
he im
pact
of
switc
hing
.
Prod
ucer
s te
nd t
o cr
eate
new
Supp
ly re
duct
ion
polic
ies
rais
e pr
ices
and
lead
to
incr
ease
d cr
imin
ality
sin
ce th
e de
man
d fo
r he
roin
is in
elas
tic;
dem
and
re-
duct
ion
polic
es a
re b
est
and
shou
ld f
ocus
on
met
hado
ne
mai
nten
ance
.
The
her
oin
mai
nten
ace
syst
em i
n E
ngla
nd h
as n
ot p
rove
n to
be
as
effe
ctiv
e as
sup
pose
d. T
reat
- m
ent s
houl
d in
clud
e dr
ug-f
ree,
de
tox,
edu
cati
on, i
ncar
cera
tion
, an
d m
etha
done
mai
nten
ance
. E
ffec
ts o
f ta
x po
licy
(su
pply
red
uc-
tion
) ar
e un
know
n, b
ut th
ere
is
a re
lati
on b
etw
een
per
capi
ta in
- cr
ease
s in
con
sum
ptio
n an
d in
- cr
ease
s in
soc
ial c
osts
. In
crea
se
in p
rice
thr
ough
tax
atio
n co
uld
lead
to
incr
ease
s in
hom
e br
ew-
ing
and
illeg
al l
iquo
r pr
oduc
tion
fo
r co
mm
erci
al p
urpo
ses.
(con
tinue
d)
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onal
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y.
Tab
le 1
(co
ntin
ued)
Aut
hor
Yea
r A
ssum
ptio
ns
Subs
tanc
e(s)
U
sers
Fi
ndin
gs/c
oncl
usio
ns
Moo
re
Pars
sine
n an
d K
erne
r
1979
Su
pply
red
ucti
on p
olic
ies
shou
ld
Her
oin
-
not o
verl
ook
the
legi
tim
ate
Coc
aine
m
edic
al u
ses
of s
ome
drug
s;
the
basi
c po
licy
of
supp
ly re
- du
ctio
n is
to
infl
uenc
e th
e re
lativ
e co
sts
and
avai
labi
lity
of a
busa
ble
drug
s.
Mar
ijuan
a
1981
T
he m
orph
ine
prob
lem
was
the
M
orph
ine
Mor
phin
e an
d he
roin
pro
blem
of
the
1920
s.
A r
educ
tion
in s
uppl
y di
d re
duce
con
sum
ptio
n, b
ut it
al
so in
crea
sed
pric
es a
nd
prof
its
in t
he il
licit
mar
ket
thro
ugh
dive
rsio
n fr
om
legi
timat
e pr
oduc
ers
to
nonm
edic
al u
sers
.
opiu
m u
sers
The
maj
or f
ocus
of
supp
ly re
duc-
ti
on s
houl
d be
con
trol
of
dive
r-
sion
fro
m le
giti
mat
e so
urce
s ab
out
whi
ch w
e ar
e be
tter
in-
form
ed.
Con
trol
of
the
illic
it m
arke
t sh
ould
str
ess
arre
sts a
t th
e tr
ansa
ctio
ns le
vel o
f re
tail-
in
g. T
his
(1)
redu
ces
the
dis-
tr
ibut
ion
pipe
line
and
(2) m
akes
tr
ansa
ctio
ns e
xcee
ding
ly m
ore
diff
icul
t. R
egul
atio
n of
the
lega
l mar
ket d
oes
not n
eces
sari
ly m
ean
that
the
le
giti
mat
e m
arke
t w
ill s
uffe
r.
We
still
do
not k
now
the
fact
ors
in a
use
r’s
deci
sion
to
take
one
pa
rtic
ular
dru
g or
to
subs
titu
te
one
for
anot
her,
or
how
pro
fit-
ab
ilit
y an
d ri
sk a
ffec
t a d
eale
r’s
deci
sion
to
smug
gle
one
drug
ra
ther
tha
n an
othe
r.
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onal
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onl
y.
Rot
tenb
erg
Sore
f
Wep
pner
and
St
ephe
ns
1968
D
isco
very
of
illic
it m
arke
ts
rela
ted
to th
e nu
mbe
r of
tr
ansa
ctio
ns.
Law
enf
orce
- m
ent w
ould
ben
efit
if s
up-
plie
rs h
eld
inve
ntor
ies
long
er.
Her
oin
1981
T
here
app
ears
to b
e a
rela
tion-
sh
ip b
etw
een
diff
icul
ty o
f m
arke
ting
con
ceal
men
t of
drug
s an
d m
arke
t co
ncen
- tr
atio
ns (m
onop
olie
s).
Her
oin
Mar
ijuan
a D
epre
ssan
ts
Stim
ulan
ts
Hal
luci
noge
ns
Poss
essi
on o
f he
roin
sho
uld
not b
e m
ade
illeg
al.
Sinc
e ad
dict
s co
m-
mit
cri
me
to g
ain
inco
me,
ri
goro
us la
w e
nfor
cem
ent
whi
ch
rais
es p
rice
s w
ill c
ause
incr
ease
s in
cri
me
sinc
e th
e de
man
d fo
r he
roin
is p
rice
ine
last
ic.
The
re a
re s
imila
ritie
s in
the
stru
c-
ture
of
drug
mar
kets
in t
erm
s of
th
e re
lati
on t
o pr
ice,
dif
ficu
ltie
s of
dis
trib
utio
n, a
ddic
tiven
ess,
an
d de
man
d el
astic
ity.
The
m
ore
mon
opol
y po
wer
, the
gr
eate
r the
pri
ce; t
he g
reat
er
the
pric
e, t
he m
ore
crim
inal
ity.
19
73
The
re h
as b
een
a gr
owth
in t
he
Met
hado
ne
Met
hado
ne u
sers
and
D
rug
cont
rol i
nter
vent
ion
polic
ies
shou
ld a
im a
t (1)
mor
e co
rrec
t as
sess
men
ts o
f do
sage
, (2)
re-
view
of
mul
tipl
e do
sage
, (3)
re
cons
ider
atio
n of
met
hado
ne
as a
pre
scri
ptio
n dr
ug, (
4) r
e-
stri
ctio
n of
the
form
s of
dis
pen-
sa
tion
(e.g
., li
quid
, pill
, dis
k).
illic
it m
arke
t fo
r met
hado
ne
caus
ed b
y di
vers
ion
from
m
etha
done
pat
ient
s an
d de
aler
s us
ing
pres
crip
tions
.
pati
ents
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B LR NARD
0
Fig. 2. Change in relative prices. P, price ofgood;D, amount of alternative drug available; H . ;inioii~iI of heroin available; p H , price of heroin; q l , original amount of H consumed: q ;. ~ r i n o i 1 i i I 0 1 hcroin consumed after ;in increasc in pH.
Since we want the addict to be faced with the problem of tolerance, we translate this to mean that with his absolute income remaining fixed, we forced him to somehow maintain the same net benefit that he had prior to the price rise: that is, as we have defined it, he must maintain his utility fixed. This situation is shown diagrammatically in Fig. 3.
The diagonal line, d h , is the budget line representing the income available and spent on H, D ; and Odh represents the maximum possible amount of H, D t h e addict can purchase for consumption. The uu curve is the utility curve. A11 points on this curve represent the same amounts of utility. The point of tangency. e , is the midpoint of the surface dlz, and this is the point where utility is maximized if the addict were to receive equal u-unit purchases of the two goods. Here we assume that the addict is indifferent between the utility he receives from H and that from D, so that one good would be perfectly substi- tutable for the other.
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ECONOMICS OF ILLICIT DRUG MARKET 689
(1
pD.0
- C h PH.H
Fig. 3. The consumer budget line. d h , the budget line-i.e., total income available for consumption; e , point of maximum utility-addict indifferent between H, D ; uu, the utility curve-each point on its surface represents the same amount of utility, but only point e is attainable.
Our problem is this: Given an original combination of H,D and a fixed income, an increase in the price of H means that the addict must choose a new combination of H,D which will enable him to maintain the same utility he began with. The individual must be compensated so that, although his combina- tion of H,D varies, his utility remains the same. This situation is demonstrated in Fig. 4.
We want to show a change (rise) in the price of H , income fixed, pD fixed, and utility fixed, so we (rotate dh) draw in d’h‘, passing it through the midpoint e-the point of tangency to the uu curve. The amount o f H purchased falls from Oh to Oh’ while the amount of Od rises to Od’. Note that since d’h’ passes through e , triangles ed’d and eh’h are equal, and Od’h’ equals Odh. So the new budget line d’h’ still keeps income fixed, and e‘ represents the original com- bination of H,D purchased. Now with a rise in the price of H , income fixed
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0 1
Fig.4. The consumer budget line: total income fixed. p D , price D (fixed); pH, price of H (increases); dh, original budget line; d 'h ' , new budget line; e , original point of maximum utility; e ' , original point of utility maximizing behavior by addict preferring H to D ; e", new point of maximum utility-pH rises, p D fixed, and addict forced to substitute D for H.
and pD fixed, the addict substitutes some D for the H he is unable to buy. With substitution the addict has a new combination of H,D at e". The new uu curve will now be a more flattened version of the original one (see Fig. 3), passing through e and joining e' to el'. This is shown in Fig. 5.
Let us summarize what was done. The concept of habituation was defined in terms of the analogous concept of economic utility. Income and pD were assumed held fixed so that with a rise in p H , the addict was faced with the choice of a new combination of H,D. The result was substitution of D for H and a new equilibrium utility at el'. The assumption of income fixed is impor- tant since, by definition, an addict is one who faces tolerance-the increase in dosage needed to maintain a desired effect. So clearly, with a price rise in H, pD fixed, the addict faced with the problem of tolerance must do some substi- tion; we are now in a position to rule out the possibility of an inelastic demand
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d‘
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d
- C h’ h pH.H
Fig. 5. The new combined utility curve: pH increases; p D fixed. e’ = e “ , with e’ and e” both representing the same amount of utility; but with an increase in p H , addict shifts t o e ” .
for heroin and to evaluate this demand in terms of the market demand for any good.
THE ADDICT AS RATIONAL CONSUMER
So far it has not been implied that the actions of the addict are classifiable as rational or that the concept of “rationality” can be developed further. We should first notice that although multidrug use as presented in the model does not imply a rational choice, given the facts that (1) there is a rise in the price of heroin, and ( 2 ) there is some constraint preventing the addict from increasing his income so that it remains fixed, then (3) the use of other drugs, either to complement or to substitute altogether for the prior amount of heroin used, can be considered a choice based upon rational decision making. However, in
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this analysis, rationality is merely a heuristic principle, for although the “utility” the addict gets from his consumption of drugs is not fully measurable, it is possible to gather empirical evidence that directly relates his behavior to changes in price--[hat is, the effect of changes per unit time in the amount of heroin and other drugs purchased for consumption by the addict. A longitudinal study (panel) of such behavior over time, when plotted, would undoubtedly approxi- mate the budget line in the Two-Goods Model, since the budget line is a kind of demand curve relating quantity demanded to a given price.
The point here is that the addict doesn’t really have to know that he is acting rationally. Only the person(s) doing the analysis needs to decide if the model of rationality being superimposed upon the behavior of the addict ade- quately approximates the addict’s behavior, and that in turn depends upon the specific context in which the model is being used. The use of a rational decision- making framework may be a more efficient way to examine (1) a segment of addicts from among those who were multidrug users prior to the price rise in H , for changes in post-price-change behavior; and ( 2 ) addicts who became multi- drug users only after a price rise in H .
A rational framework allows us to isolate the following possible outcomes (income fixed).
1. For the multidrug user: a . b. c . d. e.
a . b. No H, D only c.
Less use of H , same amount of D Less use of H , increased use of D Same use of H , lowered use of D Same use ofH, no D Detox, methadone, drug-free supervised treatment modality
Less use of H , more of D
Detox, methadone, drug-free supervised treatment modality
2 . For the heroin-only addict:
ASPECTS OF SOCIAL CONTROL
I am not unaware that placing the behavior of the addict in a rational frame- work raises implications for social control and the law. So the first thing that the reader might want to ask is whether the income-fixed assumption is a realistic one to make. This is a critically important question, but the answer, I think, is that it is indeed a very realistic assumption. Let us consider that with an increase in the price of heroin, t o pay for the now more expensive heroin, addicts will have to commit more crime or engage in activities such as prostitu- tion, burglary, shoplifting, robbery, and so forth. In the temporary short run there might be some success, but more likely there will be constraints even for
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ECONOMICS OF ILLICIT DRUG MARKET 693
an activity such as prostitution: for example, physical deterioration leading to unattractiveness, arrest, injuries from daiIy hazards, and even death. For those engaged in burglaries and shoplifting, the economic law of downward-sloping demand soon catches up. On the average-as more addicts commit burglaries and shoplifting, which are reportedly the major sources of income for the addict-any given addict can reduce his “inventories” only by accepting a lower price since he is likely to be “selling” goods identical to those offered by all other addicts and thus is more likely to be losing income. The price he receives from his “sales” will be increasingly less, since the supply of the products he has for sale will exceed the demand for the product. So, we see that income fixed is indeed a realistic assumption for a long-run analysis. The addict is not likely to increase his income by committing further crime. A single individual addict might, but the general addict population will not.
The above implies that addict-related crime is not the substantive issue it is made out to be. At least this analysis questions the theory that-since addicts steal or commit crimes to support their habits, and since their demand for heroin is inelastic-they can only pay for the now more expensive heroin by crime. The suggestion here is that a fruitful analysis of the relationship between addiction and crime can only be considered within the context of Elasticity and goods which are Complements and Substitutes. Now, before suggesting a possible social control strategy, let us proceed with the general market analysis, which utilizes the three concepts of Elasticity, Complements, and Substitutes.
GENERAL MARKET ANALYSIS
Return once again to Fig. 1 . The demand for heroin is represented by the dd curve parallel to the OP axis. This model assumes that the demand for heroin is inelastic. But when we draw a diagram we find something else, namely, that the assumption of inelasticity also means that the quantity of heroin demanded by the addict remains unchanged over time (I assume that the quality of the heroin is unvitiated). This means that the addict does not face the problem of tolerance, which is the very essence of being an addict. So this inelastic model is quite inadequate. Figure 6 shows what I consider to be the actual situation.
In Fig. 6 ss is the supply curve of heroin, dd is the demand curve before the price rise, d’d’ is the demand curve after the price rise, and 0 4 is the quantity of heroin that can be demanded. The long-run effects of a price rise will be variable on both the demand and supply sides of Fig. 6. In the tempo- rary short run, however, the demand may at first remain unchanged as the active addict population initially exploits all its current sources of income ; that is, since they should be spending all their income on H,D, we must assume that they were inefficiently maximizing their utility in the first place. With the exhaustion of all these sources will come a movement toward drugs (for the
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0 4 0
Fig. 6. The aggregate market demand for addicts. dd, original demand curve for H ; ss, supply curve; e , original equilibrium price = p ; d’d’ , new market demand curve; e’, new equilibrium market price.
heroin-only addict) which help the addict to complement his habit and also allow for the purchase of lowered amounts of H . If the current price rise prevails as a permanent, long-run situation, these complementary goods could become substitute goods used in place of heroin. We find then that the first thing to happen is that there will be a fall in the demand for H , represented by the leftward shift of the dd curve to d’d ’ ; and an increase in the purchase (demand) for Complements and Substitutes (0) will mean that there will be an increase in the price of D as soon as the demand exceeds the available supply. Further, the new higher price for heroin will be a signal to competitors to open operations or to release new supplies of heroin to the market. So now we find that the suppliers of Complements and Substitutes will initiate price increases and that the higher price for heroin will signal competitors to enter the heroin market. The suppliers of D will be able to compete efficiently for a share of
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ECONOMICS OF ILLICIT DRUG MARKET 695
the active addict market since their per unit price for D will still be lower than the per unit price for heroin.
Taking both the supply and demand sides of Fig. 6 into consideration, we will end up with a new equilibrium price for both heroin and for D which is higher than the previous price (e') for heroin but lower than the original higher price (e). This situation is shown by d"d" in Fig. 7. This new price will emerge because the heroin suppliers do not want to lose their market share to the suppliers of D , and the entrance into the market of additional suppliers of heroin will act to depress the high price in order to ration the available surplus among a more disinterested consumer population.
Let us note that even if the assumption of fixed quality is relaxed and the new higher price is being charged for a higher-quality heroin product, then the addict can still reach tolerance without necessarily spending further income
d S
d
~
9' 9" 9 Q
Fig. 7. The new aggregate market situation. e, original price; dd, original demand curve; d ' d ' , shift in demand curve due to increase of p H ; e' , new, lower equilibrium price; d"d", new long-run equilibrium demand curve; e", new equilibrium long-run price.
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since the new higher quality, although bought at a higher price, may mean that the actual number of unit purchases might decline.
IMPLICATIONS
The importance of the general market analysis is that it shows that there are self-correcting forces in operation in the illicit drug market. If this is indeed a correct assumption then public policy geared toward the curtailment of physio- logical dependence and a crime syndrome may be insufficient. Much more attention should be paid to the multidrug phenomena and the actual workings of these markets and their interactions. It would seem that public policy oriented toward market trends would aim at a target population of unidrug users, as this population would seem not to have substitutes available or prefer not to substitute, as implied by the outcomes given above for heroin-only addicts.
Those who are multidrug users appear to have substitution-in-consumption possibilities between H,D. This means that changes in price will affect the pattern of substance use without any necessary concomitant fall-back upon criminal activities. In this sense, multidrug users would be a much more difficult population to target for social control purposes. It would seem that the best time to initiate or implement public policy programs would be during periods when price rises seem to be permanent, as this would seem to be the time when the active addict population would be most susceptible to entering new pro- grams offering alternative treatments. We can now turn to a brief examination of two general areas, the implications of the current thesis for a drug source market combining licit and illicit markets, and the validity of the thesis for both short- and long-term perspectives.
DRUG SOURCE MARKETS
Since heroin maintenance is not an endorsed form of intervention support, the problem for the heroin-only addict is that his only source for this commod- ity is the illicit market, except for physician addicts who have access to prescrip- tion dosages. So there are essentially no alternatives for the heroin-only addict but to withdraw from the illicit market and receive or undergo rehabilitative treatment. For the multidrug user, for whom heroin is but one of several drugs consumed, alternatives exist in both the illicit and the licit markets.
There is a direct relationship between changes in the prices of commodities in the illicit market and the kinds of alternative legal treatments available, in the sense that the availability of legally dispensed drugs through treatment programs such as methadone maintenance will always tend to increase the elasticity of demand for heroin or any other drug on the illicit market normally
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ECONOMICS OF ILLICIT DRUG MARKET 697
consumed by the multidrug user. The previous analysis has already shown that the multidrug user has substitution-in-consumption possibilities. This is clearly true both for the licit market, where the presence of methadone maintenance clinics will increase his elasticity of demand for heroin, and for the illicit market, where the interactions of prices of different commodities will also increase his elasticity of demand for heroin. For the heroin-only addict, who has little if any substitution-in-consumption possibility, the choice seems to be increased criminality, leading to the outcomes discussed above, or withdrawal from the illicit market to undergo some form of rehabilitation.
THESIS VALIDITY
The validity of the present thesis would depend on evidence which specifies the relationskp between changes in the price of heroin and changes in the prices of other drugs, illicit or licit. Changes in the prices of licit drugs are important since diversion from licit sources is a major way to supply some drugs to the illicit market. Therefore, for both short- and long-run perspectives of this thesis, validation would rest on evidence which shows a proportionate fall in the price of heroin, quality constant per dosage unit, vis-a-vis the prices of compet- ing commodities in both the licit and illicit markets.
The implications of the thesis for social control strategies can now be examined for three areas: the drug user, the intervention system, and the community.
The Drug User
In terms of the two categories of users we have discussed, the multidrug and the heroin-only consumer, a social control policy aimed at a reduction in supply, which would raise the price of heroin (Koch and Grupp, 1971, 1973; Moore, 1979), would be the most effective policy. Such a policy would work in at least two ways. First, if it is indeed true that addicts commit crimes to support their habits (Stephens and Ellis, 1975) and if the hard-core heroin addict does show up more often and more repeatedly in jail than any other sample of people engaging in criminal activities (Fernandez, 1969), then a price rise should force more attempts at criminal behavior and hence more arrests of heroin addicts. Second, a price rise should also have the effect of leading to the self- segregation of hard-core or heroin-only addicts from multidrug users, since they are the ones most likely to increase criminal activities and thus be more likely to be arrested.
If arrests of the hard-core addicts also lead to incarceration, then we also should expect a significant decrease in addict-related crime. Aside from incar- ceration, we should expect voluntary entries into alternative rehabilitation
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programs-drug free, detox, and methadone maintenance. If these addicts are truly heroin-only addicts, we should expect that a large number of them will go through drug-free and detoxification programs. Many others will go through “cold turkey,” and still others will show up at hospitals seeking treatment.
Intervention Support System
A variety of drug treatment modalities exist as intervention support systems. They include drug-free programs leading, hopefully, to abstinence, methadone maintenance, detoxification, etc. Up to this point, however, there has been no legally endorsed program for heroin maintenance in the United States (Blum, 1979). Since heroin maintenance has not been endorsed, then the existing treatment modalities may not be able to provide more than short- term support to the heroin-only addict. This may be why follow-up studies typically show such high recidivism rates for heroin addicts. We should not overlook, however, the fact that treatments such as cold turkey, detoxification, and any kind of abstinence may help the addict to “clean out his system” and thus lower his tolerance.
A supply reduction policy which raises price should have the effect not only of forcing entry of addicts into treatment programs-where entry may cause the addict to reevaluate his unidrug habit-but will also force a choice among particular types of treatment. It is suggested that a likely choice would be programs where treatment leads to abstinence. As there is no guarantee that a heroin maintenance program would not lead to an increase in tolerance for the heroin addict, then it would not be considered a viable treatment plan. Programs stressing abstinence at least lower the tolerance of the addict, who, even if he returns to heroin use, will not have to engage in his previous level of crime to support a less expensive habit.
The Community at Large
The overriding concern of the community appears to be the effect of heroin as the primary factor in causing addicts to engage in criminal activities. We need not rake over the argument about the relation of heroin addiction to crime, or the accuracy of estimates of the active addict population, to know that we do need more accurate evidence about the whole environment of addiction. However, to the extent that there should be a number of ways to measure the effectiveness of a public policy aimed at supply reduction, then one immediate benefit which should accrue to the community at large is that a high price for heroin should decrease attempts at heroin experimentation by members of the nonaddict population since control of illicit markets would stress arrests at the transactions level of retailing and would reduce the distribution pipeline and make transactions exceedingly more difficult (Moore, 1979).
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ECONOMICS OF ILLICIT DRUG MARK.ET 699
CONCLUSION
This article has posited that the use of Consumer Behavior and Market Analysis can provide fruitful results if carefully applied to certain social problems. Since people’s reaction to changes in prices of goods is often con- sidered to be crucial both for the economy as a whole and for specific national policies as well,’ it makes sense to utilize existing tools of Price Analysis when it is felt that an individual’s or a group’s behavior shows variation to given prices of goods.
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