Jun 8, 2009

Injecting moral hazard in the illegal drug market

The damage done by cocaine, cannabis and heroine in poor countries, from Mexico to Guinea-Bissau and Afghanistan, is a sad story. Gangsters get so powerful that states fail. Fighting the supply side ends up in bloodshed. Legalization would help but rich countries are afraid (unjustifiably) of more public health problems and opposed by stubborn conservatives who just don't get it...

Here is a new idea. Markets fail when moral hazard is too much of a problem. So to make the illegal drug market fail, just inject moral hazard in it. And how do you do that? By increasing the share of impure drug. Indeed, the seller can covertly dilute (“cut”) the product, and this dilution is largely unobservable to buyers until after they consume. This asymmetric information problem may be risen up to a point of market collapse and a victory in the war on drugs!

So how can policymakers increase the share of impure drug? They could induce sellers to dilute more through a policy of reducing the sentences of sellers who “cheat” and sell low-purity drugs. "While the strategy of shortening sentences for “high diluters” looks a little like decriminalization, it is the kind of decriminalization that conservatives might find more acceptable, because it would undermine the drug trade." As conservatives need to understand, "the dichotomy between the war on drugs and decriminalization may indeed be a false one".

If this works, it would make studying economics relevant.

5 comments:

Sebastian said...

As a former cigarette addict I fiercely dispute this logic.
When you are addicted you take low quality drugs and do not care about it. All that matters is to get the stuff that makes addicted, low or high quality. I do not see how this should then lead to higher prices and a collapse of the market....

...just ask yourself whether alcohol addicts buy the expensive and good alcohol or the one that causes headache no matter how little you drink of it.

Laura said...

it doesnt make sense to me either..i heard from a doctor in the Geneva hospital that, more than once, because of impure cocaine in the market, they receive way too many clients in the hospital and can not match the demand so other people can not be trated properly..they were even thinking of calling the police to ask them to investigate who was selling impure cocaine.

Pierre-Louis said...

I got 3 negative reactions, the 2 above and one from Ana Cristina who forwarded me this news story.

The fact that health decreases is a sign that the policy might work, as new entrants will be less likely to start taking drugs...the negative health consequences are not as bad as the status quo of failed states...

externalities need to be addressed...We should not care that much about people who choose to hurt themselves...only about the impact it has on people who do not take drugs...no?

Cam said...

I have to say I completely disagree with the idea......as Cristina mentioned, increasing the impurity of the drug is a huge problem which can endanger the lives of the addicted person..

As for the comment that 'we should not care so much about those who choose to hurt themselves', this of course assumes that the drug taking is a rational choice, rather than an addiction.

From what I understand, decriminalisation and the setting up of facilities such as safe injecting rooms is about improving the lot of addicts and providing a safe environment in which they can take drugs (and hopefully come off them), in order to inhibit the spread of potentially more serious health problems e.g. HIV.

Dany Jaimovich - Bakary Baludin said...

I agree with the disagreements. Apart from the given arguments, this policy is completely regressive.

Rich consumers have inelastic demand and will pay the rise in price of the policy, which in turn will compensate producers for the extra risk of produce and sell high quality stuff (a simple Bekerian world).

But low budget consumers will not be able to pay the higher prices and will need to take the cheaper worse quality stuff, with bigger impact in health and the overcrowd of public health system mentioned by Laura.