The economics of drug prohibition

Ross Gittins has told us that the War on Drugs has more to do with economics than we might think. There is much more to it than his own analysis would suggest.

The prohibition of some drugs is, for Gittins, a ‘qualified success’. He asks us to consider the counterfactual - what would the world be like if these drugs weren't outlawed? Without the inflated prices that come with prohibition, ‘far more’ people would use drugs and the harms would be ‘almost infinitely greater’.

The assertion that ‘far more’ people would use drugs under regulation has not been borne out in reality. Cannabis stores opened in the US state of Colorado on January 1 this year. Colorado’s regulatory model is not perfect and could be more strict but nevertheless the huge increase in use and harms that Gittins predicts has not eventuated.

Selling_drugs_to_kids.jpgThere is merit in considering the counterfactuals but let’s get a better grip on the factuals first. Since we embarked on the social experiment of prohibition we’ve seen new, more potent and more harmful drugs enter the market. Traffickers have an incentive to sell anything to anyone, regardless of the harms. Far more people are using banned drugs and the harms have greatly increased.

We now have an illicit drug market that the ABS has conservatively estimated at $7 billion dollars annually and a majority of adults under 40 have used an illicit drug.

Prohibition entails the abdication of responsibility for regulating this huge consumer market. Contaminants, variable purity and misrepresentation of contents are commonplace and increase the harms.

Mark_Standen_on_Telegraph_front_page.jpgThe amount of annual profit from the illicit drug market in Australia is staggering – around six billion dollars according to the ABS. With all this money in criminal networks, corruption is inevitable. Without legal recourse to enforce contracts, violence is commonplace. As prices and profits increase, the incentive to use violence only grows.

Increased property crime is another external cost of higher prices as some people with drug addictions that they cannot afford steal to fund their demand for drugs.

Protest_over_missing_students.jpgProhibition has huge costs beyond our borders too. The drug trade is global and virtually all the cocaine and heroin consumed in Australia is imported. The 1988 UN Conventions against drug trafficking impel producer and transit countries to implement supply-side reduction efforts aimed at increasing the costs of drugs. A recent economic analysis by the London School of Economics observed that those countries pay very high costs in violence, corruption and the loss of legitimacy of state institutions. Prohibition has undermined development and security in Central and South America, Central Asia and West Africa. To ignore these costs beyond our borders is irresponsible and inhumane.

As these impacts become better known we are increasingly seeing esteemed economists arguing for an end to prohibition. Notably, The Economist magazine is among the strongest global advocates for legal regulation.

Steps towards regulation should be careful, incremental and considered. Cannabis is the most widely used illicit drug in Australia and has relatively low harms so it makes sense to start there.

Economics would have a role to play in making legal regulation effective. Some illegal drugs are very dangerous for some users. Many others are not particularly dangerous and are less addictive than other drugs like tobacco and alcohol. Under regulation, governments could use pricing to steer people away from the more harmful drugs and towards less harmful alternatives.

Police would also benefit from legal regulation as decreased profits from reduced drug prices and drug sales would shrink the size of the black market. With fewer illicit suppliers, police could concentrate their efforts.

Even in advance of any regulation of currently-illicit drugs we should be moving towards the decriminalization of use and possession of all drugs. There no evidence that the criminalization of users causes a decrease in rates of drug use or drug harms. Decriminalization would get enforcement out of the way of treating addiction as it should be: a health and social issue.

The idea that increasing prices decreases harms assumes that many people who can no longer afford a particular drug will stop using drugs entirely. This seems far fetched at best. In particular, drug addiction is often a response to experiences of trauma like childhood sexual abuse, mental illness and degraded opportunity. Let’s consider the counterfactual here. People like this who can no longer afford illicit drugs will substitute one drug for another and the harms will be maintained. We should be dealing with the drivers of addiction, not just the presence or absence of particular drugs. 

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  • Isaac Greene
    People will always be able to get their hands on drugs. Whats important is making our communities safe. Drug trafficking, gangs, mafias. All of them would have nothing is drugs were legalized. It doesn’t mean everyone would do them.
  • aaron
    Also, the prohibitionists assume that the black market will exist to undercut the regulated market, to which I say, where is the existence of bootleggers and the alcohol black market today ?
  • aaron
    His argument is not based in reality and is easily destroyed based on the fact that regulation provides greater choice and quality, both of which the consumer is willing to pay for.

    But, don’t take my word for it! Look to the states, where Mexican brick weed sells for half the price of an ounce of above board regulated and legal weed.