The Economic Theory of Illegal Goods: The Case of Drugs
NBER WORKING PAPER SERIES
THE ECONOMIC THEORY OF ILLEGAL GOODS:
THE CASE OF DRUGS
Gary S. Becker
Kevin M. Murphy
Michael Grossman
Working Paper 10976 http://www.nber.org/papers/w10976 NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
December 2004
The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National
Bureau of Economic Research.
© 2004 by Gary S. Becker, Kevin M. Murphy, and Michael Grossman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Economic Theory of Illegal Goods: the Case of Drugs
Gary S. Becker, Kevin M. Murphy, and Michael Grossman
NBER Working Paper No. 10976
December 2004
JEL No. D00, D11, D60, I11, I18
ABSTRACT
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
THE ECONOMIC THEORY OF ILLEGAL GOODS:
THE CASE OF DRUGS
Gary S. Becker
Kevin M. Murphy
Michael Grossman
Working Paper 10976 http://www.nber.org/papers/w10976 NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
December 2004
The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National
Bureau of Economic Research.
© 2004 by Gary S. Becker, Kevin M. Murphy, and Michael Grossman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Economic Theory of Illegal Goods: the Case of Drugs
Gary S. Becker, Kevin M. Murphy, and Michael Grossman
NBER Working Paper No. 10976
December 2004
JEL No. D00, D11, D60, I11, I18
ABSTRACT
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
References: Program, 1987-1991 [Computer file]. ICPSR version. Santa Monica, CA: RAND (Corporation [producer], 1995 Consortium for Political and Social Research [distributor], 1996. Press, 2001). Jeffrey A. Miron, “Drug War Crimes”, The Independent Institute, 2004. “Marijuana and Youth” in Risky Behavior Among Youths: An Economic Analysis, edited by Jonathan Gruber, University of Chicago Press, 2000, pp. the Dutch East Indies, 1923-28” Journal of Political Economy, 103, No. 2, April 1995, 261-279.