The Market for Illegal Goods: The Case of Drugs
Revista de Economía Institucional, Vol. 8, No. 15, 2006
26 Pages Posted: 7 Feb 2006
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.
Note: 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: Suggested Citation