The Economic Theory of Illegal Goods: The Case of Drugs

37 Pages Posted: 20 Dec 2004 Last revised: 30 Jun 2010

See all articles by Gary S. Becker

Gary S. Becker

University of Chicago - Department of Economics; University of Chicago - Booth School of Business

Michael Grossman

National Bureau of Economic Research (NBER), NY Office; CUNY The Graduate Center - Department of Economics

Kevin M. Murphy

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: December 2004

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 effective than continuing to prohibit the legal use of drugs.

Suggested Citation

Becker, Gary S. and Grossman, Michael and Murphy, Kevin M., The Economic Theory of Illegal Goods: The Case of Drugs (December 2004). NBER Working Paper No. w10976. Available at SSRN: https://ssrn.com/abstract=633635

Gary S. Becker

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

University of Chicago - Booth School of Business

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Michael Grossman (Contact Author)

National Bureau of Economic Research (NBER), NY Office ( email )

5 Hanover Square
16th Floor, Suite 1602
New York, NY 10004-2630
United States
917-261-3127 (Phone)
917-426-7105 (Fax)

HOME PAGE: http://mgrossman.ws.gc.cuny.edu

CUNY The Graduate Center - Department of Economics ( email )

365 Fifth Avenue, 5th Floor
New York, NY 10016
United States
212-817-7959 (Phone)
212-817-1597 (Fax)

HOME PAGE: http://mgrossman.ws.gc.cuny.edu

Kevin M. Murphy

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7280 (Phone)
773-702-2699 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
308
Abstract Views
4,628
rank
98,013
PlumX Metrics