Wednesday, April 17, 2013

Are illegal drugs price elastic?

Without a doubt, the US has a huge illegal drug problem. Incarceration rates are astronomical, highlighting that prison is neither a good deterrent nor a good strategy against repeat offenses. And one can question whether prison is appropriate in the first place. In this context, it is surprising how little we know about illegal drug demand. How does it respond to enforcement, risk, penalties or prices? Good data is hard to come by and clean experiments are rare and not necessarily generalizable.

Scott Cunningham and Keith Finlay offer one case where we may have a clean case of exogeneity in that sudden scarcity for two components of methamphetamine occurred through a country-wide ban in 1995 (which quadrupled meth prices for a few months) and 1997. Using this as an instrument, they try to explain demand as measured by admissions to drug treatment facilities. The latter is the best proxy one can find for actual consumption, but is it good enough? Only if the proxy stays proportional to consumption despite severe disruptions on the markets, which I think is a heroic assumption. In any case, they find that the price elasticity of meth is very low, maxing at -0.25 after six months. Keep in mind that this is a relatively short-run elasticity, thus hardly surprising for an addictive good. Still, cross-price elasticities reveal that meth has in alcohol a pretty good substitute. Is then an intervention in meth markets really worth it, especially if it means making cough medicine difficult to buy for the rest of us?

1 comment:

Jeff said...

Also of policy interest is the elasticity of demand for drugs within producing countries as opposed to on retail markets. (The two should be linked by the supply chain.) This is of particular interest when narcotics-industry income in some regions, like southern Afghanistan, flows to undesirables like the Taliban. In a recent project on which I've been soliciting comments I attempt to estimate the relevant elasticity using a supply shock associated with unexpectedly bad crop disease. The paper can be found at the link below it is of interest: