The Economic Theory of Illegal Goods: The Case of Drugs
Gary S. Becker
University of Chicago - Department of Economics; University of Chicago - Booth School of Business
National Bureau of Economic Research (NBER), NY Office; City University of New York Graduate Center
Kevin M. Murphy
University of Chicago; National Bureau of Economic Research (NBER)
NBER Working Paper No. w10976
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.
Number of Pages in PDF File: 37working papers series
Date posted: December 20, 2004
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.420 seconds