The real and financial value of the illegal-drugs market - Eagle Watch by Dr. Luis F. Dumlao

July 08, 2016

President Duterte is now in charge and, true to his campaign promises, the outspoken leader paid an evening visit to a slum area and unleashed profanity-laden threats against drug traffickers in front of a crowd of about 500 people. (Read: https://www.theguardian.com/world/2016/jul/01/philippines-president-rodr....)
 
Indeed, it doesn’t take an elementary-school graduate to see the harmful effects of illegal drugs, such as ecstasy and shabu. Sooner or later, the use of such drugs will destroy one’s health, both mentally and physically. It contributes to the increase in the crime rate, and destroys the relationships we cherish the most (i.e., our families).
 
Illegal drugs simply bring out the worst in any person; that’s why society has chosen to wage a war against them. The economics of the war has two main fronts: supply and demand. Supply is what the government could primarily address, while demand is where the private sector could intervene.

 

 

 
On the supply side, the government could prevent the entry and proliferation of illegal drugs in society. Availment and delivery costs for drug lords and pushers are likely to increase. Suppliers are likely to increase their prices, and users react by reducing demand. The “real market” is supposed to shrink.
However, fighting the war purely from the supply side is probably insufficient to win. As economic theory goes, demand probably won’t respond that much to price increases. In other words, increasing the price by 50 percent will most likely decrease demand by less than 50 percent. Even if the “real value” of the market decreases, the “financial value” could even increase.
 
To illustrate, suppose that the price of each drug is P100, and the resulting demand is 100 units. The real value of the market is 100 units, and its financial value is P10,000 (P100 per unit x 100 units). Suppose government enforcement could effectively increase price by 50 percent (to P150). Because addicts aren’t likely to change their behavior drastically, demand could decrease by, say, only 5 percent (to 95 units). The good news is that the real value of the market decreases to 95 units. The bad news is that the financial value increases to P14,250 (P150 per unit x 95 units). This means that addicts might have to steal more to finance their addiction.
 
It could be argued that government enforcement by itself will be more effective in the long run, since more expensive illegal drugs will discourage experimentation. As a result, the number of users should eventually decrease.
 
However, the argument probably won’t work well in practice. Since the financial value of the market increases, the potential reward for drug trafficking increases, too. This entices pushers to work more effectively. This entices others, especially the economically disadvantaged, to join the supply side. Thus, no society could really win the war via plain drug enforcement alone.
 
On the demand side, the private sector could intervene to decrease drug use and rehabilitate users. As a result, demand would decrease. Both the real and financial values of the market would shrink, whether suppliers react to the price decrease or not.

 

Again, to illustrate, suppose that the price of each drug is P100, and the resulting demand is 100 units. The real value of the market is 100 units, and its financial value is P10,000 (P100 per unit x 100 units).  Suppose private-sector intervention could effectively decrease demand by 50 percent (to 50 units). Because suppliers compete for the limited demand, they decrease their price by, say, 5 percent (to P95). The good news is that the real value of the market decreases to 50 units. The better news is that the financial value of the market decreases to P4,750 (P95 per unit x 50 units). This means that some pushers will have to switch occupation—hopefully, to more legitimate businesses. Slowly but surely, the market shrinks.
 

So, between supply and demand, a “supply-side-only” approach probably won’t be as effective as a “demand-side-only” approach. By itself, decreasing demand could ease the job of the government and spill over to decrease supply. Nevertheless, the best solution is the reduction of both supply and demand—that is, a concerted effort by the government to coerce suppliers, and by the private sector to discourage drug use.
 
Indeed, the tone of today’s discussion has been bold and aggressive, but let us pause and reflect critically on some questions. Wouldn’t compassionate—rather than strict and coercive—guidance of the youth work better in discouraging experimentation and drug use? Although drug rehabilitation will require professional and caring—not to mention expensive—treatment, wouldn’t this more humane solution ultimately work better than legal duress?