Reviewed by J.P. Cull

There has been discussion about lifting our prohibition on drugs

As economists, we know that prohibition effectively raises the price, thus its removal would drop price

We would expect to see an increase in use, at a new lower price, but how much would use really increase?

Supply side, versus demand side policies

Drug users aren’t rational, and only care about getting high, they derive an unreasonable amount of utility from it

Drug users don’t understand the future or have an unreasonable discount rate

There is no reasonable data on drug use that we can use to prove otherwise

Drug users do not act like people

Becker and Murphy 1988 Two types of goods, Addictive, Non-

Addictive People are still rational utility

maximizers Utility is a function of consumption of

both types of goods and previously consumed addictive goods, u(yt,ct,ct-1)

Model used in everything from movie attendance to illegal drug consumption

Lifetime Utility:

B is the discount rate Yt is the consumption of non-addictive

goods Ct is the current consumption of addictive

goods Ct-1 is previous consumption of addictive

goods Et is the error term

Current Consumption:

By assuming a discount rate equal to the market rate of interest, and a quadratic utility function

Ct is consumption in time t B is the rate of time preference Pt is the price in time t θ assumed +, θ1 assumed – ℮ t is the error term

University of Michigan’s Institute for Social Research, High-School Survey on alcohol/tobacco/drugs

Random Sample 15,000-19,000 high-school and ex-high-school students

1976-1985 Between 1 and 5 observations for each

person Focus on cocaine use: 2nd most popular

substance behind marijuana, pricing data available for many areas

In addition to surveys the data was helped by the DEA’s and FBI’s STRIDE system

Makes drug buys, measures total price, total weight, purity, date, and other factors

Translates prices into Per Gram Price Divides by CPI to normalize values over

time Used to fill out the data set, with over

25,000 observations

Using a TSLS fixed effect model, they re-estimated the parameters

Each variable that changes with time is transformed into a deviation from that single persons’ mean

Each variable that remains the same over time is deleted, along with variables where there is only one data point

This test confirms the past and future consumption effects, as positive and significant

And the price effect as negative

“We find that cocaine consumption is quite sensitive to its price. A permanent

10% reduction in price would cause the number of cocaine users to grow by

approximately 10% in the long-run and would increase the frequency of use

among users by a little more than 3%. “ – (p458)

This means that demand is responsive to price

This model shows the difference between a temporary change in price and a long term change:

“A temporary change that greatly raised the street price of cocaine may well only have a small effect on drug use, whereas a permanent war could have much bigger effects. For example, according to our estimates, a 10% price hike for 1 year would reduce total cocaine consumption by approximately 5%, whereas a permanent 10% price hike would lower consumption by 14%.” – (p459)

It is doubtful that this model accurately estimates the change in drug use when a state suddenly decides against prohibition (elasticity changes)

Possible government tax policies could change the price from freefalling

Illegal markets may be more efficient than we give them credit for (the price doesn’t drop much)

Forbidden fruit or formerly forbidden fruit attractive to the young

All this study does is draw a line If you know about previous use, and you

know about “future” use, draw a line, and you have a good estimate about “present” use.

Discount rate and uncertainty, assumed to be (1/1+r)

Are drug users really completely rational? (incomplete information, …)

Grossman, Michael, and Frank J. Chaloupka. "The demand for cocaine by young adults: a rational addiction approach." Journal of Health Economics 17 (1998): 427-74.