An Economic Analysis of the Illicit Drug Market

The International Journal of the Addictions, 18(5), 681-700, 1983

An Economic Analysis of the Illicit Drug Market

Godwin Bernard,* MS

Department of Sociology Graduate School and University Center of the City of New York New York, New York 10036

Abstract

Analyses of heroin addiction have often focused on its relationship to crime. It is assumed that with an increase in price, the addict who has a dependence must commit crime to support his habit. The present analysis proposes a new and critical approach to the problem based upon Consumer Behavior Analysis. It identifies the variables of Com- plements and Substitutes, and their effects upon price, supply and demand, criminality, and possible implementation of treatment modalities .

SUPPLY AND DEMAND FACTORS IN THE DRUG MARKET

Although drug addiction, especially addiction to heroin, has become one of the most perplexing of urban social problems, surprisingly little research has been done in terms of the relationship between price changes and supply and demand effectuated through a market mechanism, even if in an illicit market. Most analyses of illicit drug use have been undertaken from the point of view of social deviancy, urban decay and pathology, family breakdown, crime, and SO forth. These viewpoints are basically those of sociologists. Fewer economists still have taken notice, much less deemed the problem worthy of economic

*Address correspondence to the author at 80 Hancock Street, Brooklyn, New York 11216.

681

Copyright 0 1983 by Marcei Dekker, Inc. 0020-773)3/8 3/1805 -068 1 $ 3 -5 O/O

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682 BERNARD

analysis. In the few examples of economic analyses of heroin addiction, this has meant primarily detailing the route of the international traffic and distribution, evasion of law enforcement monitoring, the vitiation or cutting of the substance to increase its street value, and estimation of “monopoly” practices which might be mgaged in by the suppliers (Hamilton, 1972, p. 409; Holahan, 1972, p. 299; Preble and Casey, 1969, pp. 1-24).

In another economic analysis (Koch and Grupp, 1971) which focuses on the addict’s demand for heroin as a consumer, the unchallenged axiom is that the addict has a permanent physiological dependence upon heroin. Consequently, once a user becomes addicted to heroin, he must maintain tolerance -the increase in dosage needed to achieve a desired effect-or face the often painful and hazardous effects, including death, of withdrawal or the absence of heroin in his physical system. In such a situation, this analysis assumes, the addict’s demand for heroin will tend to be highly inelastic. Inelastic means that regard- less of the increase in the price of the fixed dosage unit, the addict will still maintain the demand for heroin that relates to his tolerance. Graphically, this situation of inelasticity would appear as shown in Fig. 1. This is the traditional analysis by students of heroin addiction. In such a situation, price increases will have to be met by the addict through increased criminality, prostitution, etc. But this analysis is too static, analyzing what may be no more than a temporary, short-run situation as if it were a permanent, long-run situation. By incorporating Consumer Behavior Analysis into this exposition. I intend to show that insofar as there are substitutes for the preferred drug (heroin) used by the addict, and other things being equal-identical quality and price by all sellers- the addicted consumer will demonstrate the same observable behavior to price changes as the general consumer of any other (licit) good would to changes in price. (See Table 1 for a list of relevant economic studies.)

CONSUMER BEHAVIOR ANALYSIS: THE TWO-GOODS MODEL

A review of the literature has shown that most narcotic addicts are polydrug users (Wallace and Neil, 1978, p. 241; Green et al., 1978, p. 1021). Here I assume that the drug of choice is heroin ( H ) , and alternative drugs used, whether methadone or alcohol, are called D.

To begin with, there are three concepts related to substance use which must be defined: “tolerance,” the increase in dosage needed to maintain the same or a desired effect ; “habituation,” the psychological and/or emotional needs met by drug use; “dependence,” a real quantifiable syndrome caused by withdrawal from the drug. Now these concepts must be integrated into the framework of Consumer Behavior Analysis, which will be expressed in the Two-Goods Model. Habituation is here defined in terms of the economic concept of utility-some benefit, emotional or psychological, that the consumer (addict) gets from the

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ECONOMICS OF ILLICIT DRUG MARKET 683

P

- 0 4 0

Fig. 1. Infinitely elastic demand curve. P, price of good; Q, quantity of good demanded; q , actual quantity demanded and consumed by addict(s); dd, market demand curve.

use of drugs. The assumption is made that the absolute income of the addict remains fixed-it cannot be increased by any means whatsoever. This assumption is made because the object is t o analyze the effect of a pure substitution between the two goods, not merely change due to fluctuations in the relative prices of the two goods. By holding absolute income fixed we ensure that we rule out changes in relative prices-increases lowering real income, decreases raising real income. In terms of the Two-Goods Model, holding income fixed allows us to analyze the decision the addict will have to make concerning tolerance. Figure 2 shows what we want to rule out.

Figure 2 represents a change in relative prices; the price of D (PO) is held constant and the price of H (pH) increases, so the result is a fall in the amount of H purchased. If one follows the analysis so far, it should be seen that the diagram does not yet incorporate any of the concepts we are interested in examining.

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Tab

le 1

Res

ourc

e L

ist

of

Eco

no

mic

Stu

dies

~~

Aut

hor

Yea

r A

ssum

ptio

ns

Subs

tnnc

e(5)

Aga

r an

d 19

75

Met

hado

ne u

se a

con

sequ

ence

of

Met

hddo

ne

Step

hens

he

avy

inul

tidr

ug u

se p

robl

em

Atk

yns

1974

A

fal

se d

icho

tom

y ex

ists

bet

wee

n M

ethe

drin

e th

e pu

sher

who

is n

ot a

n B

arbi

tura

tes

addi

ct a

nd t

he p

ushe

r w

ho is

M

ariju

ana

addi

cted

. H

ashi

sh

Opi

ates

Blu

m

Eric

k son

Ham

ilto

n

1979

H

eroi

n us

e is

not

inev

itabl

y H

eroi

n ad

dict

ive.

Mos

t pe

rson

s w

ith h

eroi

n ex

peri

ence

are

no

t add

icts

. T

here

is n

o pr

oof

that

her

oin

use

caus

es

crim

e. a

nd c

rim

inal

ity

pre-

ce

des

addi

ctio

n.

low

ers

sale

s whe

n pr

ices

ri

se.

1969

A

n el

astic

dem

and

for

hero

in

Her

oin

Her

oin

user

s

1972

T

he ro

le o

f ci

gare

tte

adve

rtis

ing

Cig

aret

tes

was

to

incr

ease

com

peti

tion

Use

rs

Find

ings

jcon

clus

ions

Out

pati

ent

met

hado

ne

mai

nten

ance

cli

ents

In

crea

sed

met

hado

ne u

se r

elat

ed t

o (1

) che

apne

ss o

f dr

ug a

nd (

2)

high

and

con

sist

ent q

uali

ty o

f m

etha

done

. 50

% of

dea

lers

dea

lt d

rugs

to

obta

in

free

sup

plie

s fo

r th

eir

own

use.

M

ost

deal

ers

ofte

n so

ld m

ore

than

one

typ

e of

dru

g an

d ha

d ty

pica

lly u

sed

drug

s bef

ore

beco

min

g de

aler

s.

Nei

ther

sup

ply

nor

dem

and

redu

c-

tion

pol

icie

s se

em t

o be

eff

ec-

tive.

Ini

tiat

e a

twof

old

poli

cy:

beef

up

patr

ols

to a

rres

t id

enti

- fi

able

her

oin

user

s; p

rovi

de

hero

in m

aint

enan

ce i

nter

ven-

ti

on.

Supp

ly r

educ

tion

pol

icie

s ca

use

grow

th o

f m

onop

olie

s by

su

pplie

rs, w

ho c

an r

aise

pri

ces.

T

his

lead

s to

incr

ease

d ad

dict

cr

imin

alit

y. B

ut t

he e

xist

ence

of

met

hado

ne m

aint

enan

ce

clin

ics c

an e

nsur

e a

mor

e el

astic

de

man

d fo

r her

oin.

B

anni

ng T

V a

ds re

duce

d co

nipe

ti-

tion

and

led

to c

arte

liza

tion

of

Subu

rban

dea

lers

Subs

t Use

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onal

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onl

y.

for m

arke

t sh

ares

, not

to

stim

ulat

e de

man

d.

Kat

zper

, Ryb

ack,

19

78

Hea

vy u

se o

f al

coho

l an

d it

s A

lcoh

ol

Gen

eral

dri

nker

s an

d H

ertz

man

so

cial

cos

ts c

an b

e re

gula

ted;

al

coho

l con

sum

ptio

n va

ries

di

rect

ly w

ith

pric

e an

d av

ail-

abil

ity,

as w

ith

othe

r co

m-

mod

itie

s.

Koc

h an

d G

rupp

19

71

Exc

ept

for

user

pus

hers

, sup

plie

rs

Her

oin

can

be d

iffe

rent

iate

d fr

om c

on-

sum

ers.

Som

e po

licie

s af

fect

us

ers

mor

e th

an d

eale

rs; r

educ

- ti

on p

olic

y ef

fect

iven

ess

mea

- su

red

in t

wo

way

s: r

educ

tion

in

qua

ntit

y co

nsum

ed a

nd r

e-

duct

ion

in d

olla

r ex

pend

itur

e.

the

pric

e of

her

oin

and

caus

e in

crea

sed

crim

inal

ity

sinc

e th

e de

man

d fo

r he

roin

is

inel

astic

.

Koc

h an

d G

rupp

19

73

Supp

ly r

educ

tion

pol

icie

s ra

ise

Her

oin

May

nard

and

K

enna

n 19

81

Alc

ohol

abu

se is

not

just

in

divi

dual

but

incu

rs s

ocia

l co

sts

in th

e fa

mily

and

the

pr

ivat

e an

d pu

blic

sec

tors

.

Alc

ohol

the

indu

stry

sin

ce it

clo

sed

the

prin

cipa

l ch

anne

l ope

n to

riva

l pr

oduc

t pr

omot

ions

.

bran

ds t

o at

trac

t ne

w u

sers

. N

ew b

rand

s fr

om th

e sa

me

sup-

pl

ier

less

en t

he im

pact

of

switc

hing

.

Prod

ucer

s te

nd t

o cr

eate

new

Supp

ly re

duct

ion

polic

ies

rais

e pr

ices

and

lead

to

incr

ease

d cr

imin

ality

sin

ce th

e de

man

d fo

r he

roin

is in

elas

tic;

dem

and

re-

duct

ion

polic

es a

re b

est

and

shou

ld f

ocus

on

met

hado

ne

mai

nten

ance

.

The

her

oin

mai

nten

ace

syst

em i

n E

ngla

nd h

as n

ot p

rove

n to

be

as

effe

ctiv

e as

sup

pose

d. T

reat

- m

ent s

houl

d in

clud

e dr

ug-f

ree,

de

tox,

edu

cati

on, i

ncar

cera

tion

, an

d m

etha

done

mai

nten

ance

. E

ffec

ts o

f ta

x po

licy

(su

pply

red

uc-

tion

) ar

e un

know

n, b

ut th

ere

is

a re

lati

on b

etw

een

per

capi

ta in

- cr

ease

s in

con

sum

ptio

n an

d in

- cr

ease

s in

soc

ial c

osts

. In

crea

se

in p

rice

thr

ough

tax

atio

n co

uld

lead

to

incr

ease

s in

hom

e br

ew-

ing

and

illeg

al l

iquo

r pr

oduc

tion

fo

r co

mm

erci

al p

urpo

ses.

(con

tinue

d)

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t Use

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Tab

le 1

(co

ntin

ued)

Aut

hor

Yea

r A

ssum

ptio

ns

Subs

tanc

e(s)

U

sers

Fi

ndin

gs/c

oncl

usio

ns

Moo

re

Pars

sine

n an

d K

erne

r

1979

Su

pply

red

ucti

on p

olic

ies

shou

ld

Her

oin

-

not o

verl

ook

the

legi

tim

ate

Coc

aine

m

edic

al u

ses

of s

ome

drug

s;

the

basi

c po

licy

of

supp

ly re

- du

ctio

n is

to

infl

uenc

e th

e re

lativ

e co

sts

and

avai

labi

lity

of a

busa

ble

drug

s.

Mar

ijuan

a

1981

T

he m

orph

ine

prob

lem

was

the

M

orph

ine

Mor

phin

e an

d he

roin

pro

blem

of

the

1920

s.

A r

educ

tion

in s

uppl

y di

d re

duce

con

sum

ptio

n, b

ut it

al

so in

crea

sed

pric

es a

nd

prof

its

in t

he il

licit

mar

ket

thro

ugh

dive

rsio

n fr

om

legi

timat

e pr

oduc

ers

to

nonm

edic

al u

sers

.

opiu

m u

sers

The

maj

or f

ocus

of

supp

ly re

duc-

ti

on s

houl

d be

con

trol

of

dive

r-

sion

fro

m le

giti

mat

e so

urce

s ab

out

whi

ch w

e ar

e be

tter

in-

form

ed.

Con

trol

of

the

illic

it m

arke

t sh

ould

str

ess

arre

sts a

t th

e tr

ansa

ctio

ns le

vel o

f re

tail-

in

g. T

his

(1)

redu

ces

the

dis-

tr

ibut

ion

pipe

line

and

(2) m

akes

tr

ansa

ctio

ns e

xcee

ding

ly m

ore

diff

icul

t. R

egul

atio

n of

the

lega

l mar

ket d

oes

not n

eces

sari

ly m

ean

that

the

le

giti

mat

e m

arke

t w

ill s

uffe

r.

We

still

do

not k

now

the

fact

ors

in a

use

r’s

deci

sion

to

take

one

pa

rtic

ular

dru

g or

to

subs

titu

te

one

for

anot

her,

or

how

pro

fit-

ab

ilit

y an

d ri

sk a

ffec

t a d

eale

r’s

deci

sion

to

smug

gle

one

drug

ra

ther

tha

n an

othe

r.

Subs

t Use

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For

pers

onal

use

onl

y.

Rot

tenb

erg

Sore

f

Wep

pner

and

St

ephe

ns

1968

D

isco

very

of

illic

it m

arke

ts

rela

ted

to th

e nu

mbe

r of

tr

ansa

ctio

ns.

Law

enf

orce

- m

ent w

ould

ben

efit

if s

up-

plie

rs h

eld

inve

ntor

ies

long

er.

Her

oin

1981

T

here

app

ears

to b

e a

rela

tion-

sh

ip b

etw

een

diff

icul

ty o

f m

arke

ting

con

ceal

men

t of

drug

s an

d m

arke

t co

ncen

- tr

atio

ns (m

onop

olie

s).

Her

oin

Mar

ijuan

a D

epre

ssan

ts

Stim

ulan

ts

Hal

luci

noge

ns

Poss

essi

on o

f he

roin

sho

uld

not b

e m

ade

illeg

al.

Sinc

e ad

dict

s co

m-

mit

cri

me

to g

ain

inco

me,

ri

goro

us la

w e

nfor

cem

ent

whi

ch

rais

es p

rice

s w

ill c

ause

incr

ease

s in

cri

me

sinc

e th

e de

man

d fo

r he

roin

is p

rice

ine

last

ic.

The

re a

re s

imila

ritie

s in

the

stru

c-

ture

of

drug

mar

kets

in t

erm

s of

th

e re

lati

on t

o pr

ice,

dif

ficu

ltie

s of

dis

trib

utio

n, a

ddic

tiven

ess,

an

d de

man

d el

astic

ity.

The

m

ore

mon

opol

y po

wer

, the

gr

eate

r the

pri

ce; t

he g

reat

er

the

pric

e, t

he m

ore

crim

inal

ity.

19

73

The

re h

as b

een

a gr

owth

in t

he

Met

hado

ne

Met

hado

ne u

sers

and

D

rug

cont

rol i

nter

vent

ion

polic

ies

shou

ld a

im a

t (1)

mor

e co

rrec

t as

sess

men

ts o

f do

sage

, (2)

re-

view

of

mul

tipl

e do

sage

, (3)

re

cons

ider

atio

n of

met

hado

ne

as a

pre

scri

ptio

n dr

ug, (

4) r

e-

stri

ctio

n of

the

form

s of

dis

pen-

sa

tion

(e.g

., li

quid

, pill

, dis

k).

illic

it m

arke

t fo

r met

hado

ne

caus

ed b

y di

vers

ion

from

m

etha

done

pat

ient

s an

d de

aler

s us

ing

pres

crip

tions

.

pati

ents

Subs

t Use

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B LR NARD

0

Fig. 2. Change in relative prices. P, price ofgood;D, amount of alternative drug available; H . ;inioii~iI of heroin available; p H , price of heroin; q l , original amount of H consumed: q ;. ~ r i n o i 1 i i I 0 1 hcroin consumed after ;in increasc in pH.

Since we want the addict to be faced with the problem of tolerance, we translate this to mean that with his absolute income remaining fixed, we forced him to somehow maintain the same net benefit that he had prior to the price rise: that is, as we have defined it, he must maintain his utility fixed. This situation is shown diagrammatically in Fig. 3.

The diagonal line, d h , is the budget line representing the income available and spent on H, D ; and Odh represents the maximum possible amount of H, D t h e addict can purchase for consumption. The uu curve is the utility curve. A11 points on this curve represent the same amounts of utility. The point of tangency. e , is the midpoint of the surface dlz, and this is the point where utility is maximized if the addict were to receive equal u-unit purchases of the two goods. Here we assume that the addict is indifferent between the utility he receives from H and that from D, so that one good would be perfectly substi- tutable for the other.

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(1

pD.0

- C h PH.H

Fig. 3. The consumer budget line. d h , the budget line-i.e., total income available for consumption; e , point of maximum utility-addict indifferent between H, D ; uu, the utility curve-each point on its surface represents the same amount of utility, but only point e is attainable.

Our problem is this: Given an original combination of H,D and a fixed income, an increase in the price of H means that the addict must choose a new combination of H,D which will enable him to maintain the same utility he began with. The individual must be compensated so that, although his combination of H,D varies, his utility remains the same. This situation is demonstrated in Fig. 4.

We want to show a change (rise) in the price of H , income fixed, pD fixed, and utility fixed, so we (rotate dh) draw in d’h‘, passing it through the midpoint e-the point of tangency to the uu curve. The amount o f H purchased falls from Oh to Oh’ while the amount of Od rises to Od’. Note that since d’h’ passes through e , triangles ed’d and eh’h are equal, and Od’h’ equals Odh. So the new budget line d’h’ still keeps income fixed, and e‘ represents the original combination of H,D purchased. Now with a rise in the price of H , income fixed

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0 1

Fig.4. The consumer budget line: total income fixed. p D , price D (fixed); pH, price of H (increases); dh, original budget line; d 'h ' , new budget line; e , original point of maximum utility; e ' , original point of utility maximizing behavior by addict preferring H to D ; e", new point of maximum utility-pH rises, p D fixed, and addict forced to substitute D for H.

and pD fixed, the addict substitutes some D for the H he is unable to buy. With substitution the addict has a new combination of H,D at e". The new uu curve will now be a more flattened version of the original one (see Fig. 3), passing through e and joining e' to el'. This is shown in Fig. 5.

Let us summarize what was done. The concept of habituation was defined in terms of the analogous concept of economic utility. Income and pD were assumed held fixed so that with a rise in p H , the addict was faced with the choice of a new combination of H,D. The result was substitution of D for H and a new equilibrium utility at el'. The assumption of income fixed is important since, by definition, an addict is one who faces tolerance-the increase in dosage needed to maintain a desired effect. So clearly, with a price rise in H, pD fixed, the addict faced with the problem of tolerance must do some substi- tion; we are now in a position to rule out the possibility of an inelastic demand

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d‘

PD,D

d

- C h’ h pH.H

Fig. 5. The new combined utility curve: pH increases; p D fixed. e’ = e “ , with e’ and e” both representing the same amount of utility; but with an increase in p H , addict shifts t o e ” .

for heroin and to evaluate this demand in terms of the market demand for any good.

THE ADDICT AS RATIONAL CONSUMER

So far it has not been implied that the actions of the addict are classifiable as rational or that the concept of “rationality” can be developed further. We should first notice that although multidrug use as presented in the model does not imply a rational choice, given the facts that (1) there is a rise in the price of heroin, and ( 2 ) there is some constraint preventing the addict from increasing his income so that it remains fixed, then (3) the use of other drugs, either to complement or to substitute altogether for the prior amount of heroin used, can be considered a choice based upon rational decision making. However, in

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this analysis, rationality is merely a heuristic principle, for although the “utility” the addict gets from his consumption of drugs is not fully measurable, it is possible to gather empirical evidence that directly relates his behavior to changes in price--[hat is, the effect of changes per unit time in the amount of heroin and other drugs purchased for consumption by the addict. A longitudinal study (panel) of such behavior over time, when plotted, would undoubtedly approxi- mate the budget line in the Two-Goods Model, since the budget line is a kind of demand curve relating quantity demanded to a given price.

The point here is that the addict doesn’t really have to know that he is acting rationally. Only the person(s) doing the analysis needs to decide if the model of rationality being superimposed upon the behavior of the addict ade- quately approximates the addict’s behavior, and that in turn depends upon the specific context in which the model is being used. The use of a rational decision- making framework may be a more efficient way to examine (1) a segment of addicts from among those who were multidrug users prior to the price rise in H , for changes in post-price-change behavior; and ( 2 ) addicts who became multidrug users only after a price rise in H .

A rational framework allows us to isolate the following possible outcomes (income fixed).

1. For the multidrug user: a . b. c . d. e.

a . b. No H, D only c.

Less use of H , same amount of D Less use of H , increased use of D Same use of H , lowered use of D Same use ofH, no D Detox, methadone, drug-free supervised treatment modality

Less use of H , more of D

Detox, methadone, drug-free supervised treatment modality

2 . For the heroin-only addict:

ASPECTS OF SOCIAL CONTROL

I am not unaware that placing the behavior of the addict in a rational framework raises implications for social control and the law. So the first thing that the reader might want to ask is whether the income-fixed assumption is a realistic one to make. This is a critically important question, but the answer, I think, is that it is indeed a very realistic assumption. Let us consider that with an increase in the price of heroin, t o pay for the now more expensive heroin, addicts will have to commit more crime or engage in activities such as prostitution, burglary, shoplifting, robbery, and so forth. In the temporary short run there might be some success, but more likely there will be constraints even for

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an activity such as prostitution: for example, physical deterioration leading to unattractiveness, arrest, injuries from daiIy hazards, and even death. For those engaged in burglaries and shoplifting, the economic law of downward-sloping demand soon catches up. On the average-as more addicts commit burglaries and shoplifting, which are reportedly the major sources of income for the addict-any given addict can reduce his “inventories” only by accepting a lower price since he is likely to be “selling” goods identical to those offered by all other addicts and thus is more likely to be losing income. The price he receives from his “sales” will be increasingly less, since the supply of the products he has for sale will exceed the demand for the product. So, we see that income fixed is indeed a realistic assumption for a long-run analysis. The addict is not likely to increase his income by committing further crime. A single individual addict might, but the general addict population will not.

The above implies that addict-related crime is not the substantive issue it is made out to be. At least this analysis questions the theory that-since addicts steal or commit crimes to support their habits, and since their demand for heroin is inelastic-they can only pay for the now more expensive heroin by crime. The suggestion here is that a fruitful analysis of the relationship between addiction and crime can only be considered within the context of Elasticity and goods which are Complements and Substitutes. Now, before suggesting a possible social control strategy, let us proceed with the general market analysis, which utilizes the three concepts of Elasticity, Complements, and Substitutes.

GENERAL MARKET ANALYSIS

Return once again to Fig. 1 . The demand for heroin is represented by the dd curve parallel to the OP axis. This model assumes that the demand for heroin is inelastic. But when we draw a diagram we find something else, namely, that the assumption of inelasticity also means that the quantity of heroin demanded by the addict remains unchanged over time (I assume that the quality of the heroin is unvitiated). This means that the addict does not face the problem of tolerance, which is the very essence of being an addict. So this inelastic model is quite inadequate. Figure 6 shows what I consider to be the actual situation.

In Fig. 6 ss is the supply curve of heroin, dd is the demand curve before the price rise, d’d’ is the demand curve after the price rise, and 0 4 is the quantity of heroin that can be demanded. The long-run effects of a price rise will be variable on both the demand and supply sides of Fig. 6. In the temporary short run, however, the demand may at first remain unchanged as the active addict population initially exploits all its current sources of income ; that is, since they should be spending all their income on H,D, we must assume that they were inefficiently maximizing their utility in the first place. With the exhaustion of all these sources will come a movement toward drugs (for the

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0 4 0

Fig. 6. The aggregate market demand for addicts. dd, original demand curve for H ; ss, supply curve; e , original equilibrium price = p ; d’d’ , new market demand curve; e’, new equilibrium market price.

heroin-only addict) which help the addict to complement his habit and also allow for the purchase of lowered amounts of H . If the current price rise prevails as a permanent, long-run situation, these complementary goods could become substitute goods used in place of heroin. We find then that the first thing to happen is that there will be a fall in the demand for H , represented by the leftward shift of the dd curve to d’d ’ ; and an increase in the purchase (demand) for Complements and Substitutes (0) will mean that there will be an increase in the price of D as soon as the demand exceeds the available supply. Further, the new higher price for heroin will be a signal to competitors to open operations or to release new supplies of heroin to the market. So now we find that the suppliers of Complements and Substitutes will initiate price increases and that the higher price for heroin will signal competitors to enter the heroin market. The suppliers of D will be able to compete efficiently for a share of

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the active addict market since their per unit price for D will still be lower than the per unit price for heroin.

Taking both the supply and demand sides of Fig. 6 into consideration, we will end up with a new equilibrium price for both heroin and for D which is higher than the previous price (e') for heroin but lower than the original higher price (e). This situation is shown by d"d" in Fig. 7. This new price will emerge because the heroin suppliers do not want to lose their market share to the suppliers of D , and the entrance into the market of additional suppliers of heroin will act to depress the high price in order to ration the available surplus among a more disinterested consumer population.

Let us note that even if the assumption of fixed quality is relaxed and the new higher price is being charged for a higher-quality heroin product, then the addict can still reach tolerance without necessarily spending further income

d S

d

~

9' 9" 9 Q

Fig. 7. The new aggregate market situation. e, original price; dd, original demand curve; d ' d ' , shift in demand curve due to increase of p H ; e' , new, lower equilibrium price; d"d", new long-run equilibrium demand curve; e", new equilibrium long-run price.

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since the new higher quality, although bought at a higher price, may mean that the actual number of unit purchases might decline.

IMPLICATIONS

The importance of the general market analysis is that it shows that there are self-correcting forces in operation in the illicit drug market. If this is indeed a correct assumption then public policy geared toward the curtailment of physiological dependence and a crime syndrome may be insufficient. Much more attention should be paid to the multidrug phenomena and the actual workings of these markets and their interactions. It would seem that public policy oriented toward market trends would aim at a target population of unidrug users, as this population would seem not to have substitutes available or prefer not to substitute, as implied by the outcomes given above for heroin-only addicts.

Those who are multidrug users appear to have substitution-in-consumption possibilities between H,D. This means that changes in price will affect the pattern of substance use without any necessary concomitant fall-back upon criminal activities. In this sense, multidrug users would be a much more difficult population to target for social control purposes. It would seem that the best time to initiate or implement public policy programs would be during periods when price rises seem to be permanent, as this would seem to be the time when the active addict population would be most susceptible to entering new programs offering alternative treatments. We can now turn to a brief examination of two general areas, the implications of the current thesis for a drug source market combining licit and illicit markets, and the validity of the thesis for both short- and long-term perspectives.

DRUG SOURCE MARKETS

Since heroin maintenance is not an endorsed form of intervention support, the problem for the heroin-only addict is that his only source for this commod- ity is the illicit market, except for physician addicts who have access to prescrip- tion dosages. So there are essentially no alternatives for the heroin-only addict but to withdraw from the illicit market and receive or undergo rehabilitative treatment. For the multidrug user, for whom heroin is but one of several drugs consumed, alternatives exist in both the illicit and the licit markets.

There is a direct relationship between changes in the prices of commodities in the illicit market and the kinds of alternative legal treatments available, in the sense that the availability of legally dispensed drugs through treatment programs such as methadone maintenance will always tend to increase the elasticity of demand for heroin or any other drug on the illicit market normally

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consumed by the multidrug user. The previous analysis has already shown that the multidrug user has substitution-in-consumption possibilities. This is clearly true both for the licit market, where the presence of methadone maintenance clinics will increase his elasticity of demand for heroin, and for the illicit market, where the interactions of prices of different commodities will also increase his elasticity of demand for heroin. For the heroin-only addict, who has little if any substitution-in-consumption possibility, the choice seems to be increased criminality, leading to the outcomes discussed above, or withdrawal from the illicit market to undergo some form of rehabilitation.

THESIS VALIDITY

The validity of the present thesis would depend on evidence which specifies the relationskp between changes in the price of heroin and changes in the prices of other drugs, illicit or licit. Changes in the prices of licit drugs are important since diversion from licit sources is a major way to supply some drugs to the illicit market. Therefore, for both short- and long-run perspectives of this thesis, validation would rest on evidence which shows a proportionate fall in the price of heroin, quality constant per dosage unit, vis-a-vis the prices of compet- ing commodities in both the licit and illicit markets.

The implications of the thesis for social control strategies can now be examined for three areas: the drug user, the intervention system, and the community.

The Drug User

In terms of the two categories of users we have discussed, the multidrug and the heroin-only consumer, a social control policy aimed at a reduction in supply, which would raise the price of heroin (Koch and Grupp, 1971, 1973; Moore, 1979), would be the most effective policy. Such a policy would work in at least two ways. First, if it is indeed true that addicts commit crimes to support their habits (Stephens and Ellis, 1975) and if the hard-core heroin addict does show up more often and more repeatedly in jail than any other sample of people engaging in criminal activities (Fernandez, 1969), then a price rise should force more attempts at criminal behavior and hence more arrests of heroin addicts. Second, a price rise should also have the effect of leading to the self- segregation of hard-core or heroin-only addicts from multidrug users, since they are the ones most likely to increase criminal activities and thus be more likely to be arrested.

If arrests of the hard-core addicts also lead to incarceration, then we also should expect a significant decrease in addict-related crime. Aside from incarceration, we should expect voluntary entries into alternative rehabilitation

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programs-drug free, detox, and methadone maintenance. If these addicts are truly heroin-only addicts, we should expect that a large number of them will go through drug-free and detoxification programs. Many others will go through “cold turkey,” and still others will show up at hospitals seeking treatment.

Intervention Support System

A variety of drug treatment modalities exist as intervention support systems. They include drug-free programs leading, hopefully, to abstinence, methadone maintenance, detoxification, etc. Up to this point, however, there has been no legally endorsed program for heroin maintenance in the United States (Blum, 1979). Since heroin maintenance has not been endorsed, then the existing treatment modalities may not be able to provide more than short- term support to the heroin-only addict. This may be why follow-up studies typically show such high recidivism rates for heroin addicts. We should not overlook, however, the fact that treatments such as cold turkey, detoxification, and any kind of abstinence may help the addict to “clean out his system” and thus lower his tolerance.

A supply reduction policy which raises price should have the effect not only of forcing entry of addicts into treatment programs-where entry may cause the addict to reevaluate his unidrug habit-but will also force a choice among particular types of treatment. It is suggested that a likely choice would be programs where treatment leads to abstinence. As there is no guarantee that a heroin maintenance program would not lead to an increase in tolerance for the heroin addict, then it would not be considered a viable treatment plan. Programs stressing abstinence at least lower the tolerance of the addict, who, even if he returns to heroin use, will not have to engage in his previous level of crime to support a less expensive habit.

The Community at Large

The overriding concern of the community appears to be the effect of heroin as the primary factor in causing addicts to engage in criminal activities. We need not rake over the argument about the relation of heroin addiction to crime, or the accuracy of estimates of the active addict population, to know that we do need more accurate evidence about the whole environment of addiction. However, to the extent that there should be a number of ways to measure the effectiveness of a public policy aimed at supply reduction, then one immediate benefit which should accrue to the community at large is that a high price for heroin should decrease attempts at heroin experimentation by members of the nonaddict population since control of illicit markets would stress arrests at the transactions level of retailing and would reduce the distribution pipeline and make transactions exceedingly more difficult (Moore, 1979).

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ECONOMICS OF ILLICIT DRUG MARK.ET 699

CONCLUSION

This article has posited that the use of Consumer Behavior and Market Analysis can provide fruitful results if carefully applied to certain social problems. Since people’s reaction to changes in prices of goods is often considered to be crucial both for the economy as a whole and for specific national policies as well,’ it makes sense to utilize existing tools of Price Analysis when it is felt that an individual’s or a group’s behavior shows variation to given prices of goods.

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Documents

An Economic Analysis of the Illicit Drug Market