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The Market for Illegal Goods: The Case of Drugs

Journal of Political Economy, Vol. 114, pp. 38-60, February 2006

Revista de Economía Institucional, Vol. 8, No. 15, 2006

26 Pages Posted: 7 Feb 2006  

Gary S. Becker

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

Kevin M. Murphy

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

Michael Grossman

National Bureau of Economic Research (NBER), NY Office; City University of New York Graduate Center

Abstract

This paper considers the costs of reducing consumption of goods by making their production illegal and punishing illegal producers. We use illegal drugs as a prominent example. We show that the more inelastic either demand for or supply of goods is, the greater the increase in social cost from further reducing its production by greater enforcement efforts. So, optimal public expenditures on the apprehension and conviction of illegal suppliers depend not only on the difference between the social and private values of consumption, but also on this elasticity. When demand and supply are no so elastic, it does not pay to enforce any prohibition unless the social value is negative. We also show that a monetary tax could cause a greater reduction in output and increase in price than optimal enforcement against the same goods if it were illegal, even though some producers may go underground to avoid a monetary tax. When enforcement is costly, excise taxes and quantity restrictions are not equivalent.

Notes: Downloadable document is in Spanish.

Keywords: illegal goods, illegal producers, drugs, monetary tax, decriminalization, elasticity, social cost

JEL Classification: E26, H21, K42, L51

Suggested Citation

Becker, Gary S. and Murphy, Kevin M. and Grossman, Michael, The Market for Illegal Goods: The Case of Drugs. Journal of Political Economy, Vol. 114, pp. 38-60, February 2006; Revista de Economía Institucional, Vol. 8, No. 15, 2006. Available at SSRN: https://ssrn.com/abstract=880802

Gary S. Becker (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
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University of Chicago - Booth School of Business

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Kevin M. Murphy

University of Chicago ( email )

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773-702-7280 (Phone)
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National Bureau of Economic Research (NBER)

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Michael Grossman

City University of New York Graduate Center ( email )

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

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HOME PAGE: http://https://wfs.gc.cuny.edu/MGrossman/www/

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