How Economists Would Wage the War on Drugs

The monstrous cartels that run the narcotics business face the same dilemmas as ordinary firms—and have the same weaknesses

By Tom Wainwright, in the WSJ. Mr. Wainwright is the Britain editor of the Economist and the author of “Narconomics: How to Run a Drug Cartel,” to be published Tuesday by PublicAffairs. Excerpts:

"The number of people using cannabis and cocaine has risen by half since 1998, while the number taking heroin and other opiates has tripled." (despite large governmental efforts to stop it)

"Take cocaine, which presents one of the great economic puzzles of narcotics. The war against cocaine rests on a simple idea: If you restrict its supply, you force up its price, and fewer people will buy it. Andean governments have thus deployed their armies to uproot the coca bushes that provide cocaine’s raw ingredient. Each year, they eradicate coca plants covering an area 14 times the size of Manhattan, depriving the cartels of about half their harvest. But despite the slashing and burning, the price of cocaine in the U.S. has hardly budged, bobbing between $150 and $200 per pure gram for most of the past 20 years. How have the cartels done it?"

 The drug lords have both monopsony and monopoly power.

"In the Andes, where coca farmers tend to sell to a single dominant militia, the same thing seems to be happening. Cross-referencing data on coca-bush eradication with local price information shows that, in regions where eradication has created a coca shortage, farmers don’t increase their prices as one might expect. It isn’t that crop eradication is having no effect; the problem is that its cost is forced onto Andean peasants, not drug cartels or their customers."

Even if the price of coca could be raised, it wouldn’t have much effect on cocaine’s street price. The raw leaf needed to make one kilogram of cocaine powder costs about $400 in Colombia; in the U.S., that kilogram retails for around $150,000, once divided into one-gram portions. So even if governments doubled the price of coca leaf, from $400 to $800, cocaine’s retail price would at most rise from $150,000 to $150,400 per kilogram."

"Demand for drugs is inelastic—that is, when prices rise, people cut their consumption relatively little. (Given that most banned drugs are addictive, this isn’t surprising.) So even when governments can drive up prices, dealers continue to sell almost as much as they did before—only at higher prices, meaning that the value of the criminal market increases. Reducing demand, by contrast, triggers a fall in both the amount consumed and the price paid, cutting into the criminal market on two fronts.

Demand-side interventions are not only more effective, they’re also considerably cheaper than playing about with helicopters in the Andes. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America; spending it on treatment for addicts reduces it by 10 times as much. Rehab programs for prescription-painkiller users might seem costly, but they prevent those people from slipping into the colossally more expensive problem of heroin addiction. Where demand cannot be dampened, it can be redirected toward a legal source, as a few U.S. states have done with marijuana—a development that has inflicted bigger losses on the cartels than any supply-disruption policy."