The economics of drug prohibition and drug legalization

Social Research, Fall, 2001 by Jeffrey A. Miron

I. Introduction

AROUND the world, the legal status of commodities such as marijuana, cocaine, and heroin differs dramatically from that of nearly all other goods. Most commodities are subject to substantial regulation and taxation, but the production, distribution, sale, and possession of illegal drugs are prohibited outright. Violation of these prohibitions is punishable by lengthy jail terms, and many governments devote enormous resources to enforcing these prohibition regimes.

The presumed justification for the special legal treatment of drugs is that drug use causes substantial harm both to drug users and to society generally. According to conventional wisdom, drug use diminishes the productivity of the drug user, encourages violent and nonviolent crime, contributes to moral degradation, damages the public purse, harms unborn children, etc. The prohibition of drugs is assumed necessary to reduce the consumption of drugs and thereby reduce the ills caused by drug consumption.

This paper explains that many of the harms typically attributed to drug use are instead due to drug prohibition. This is not to deny that drugs can have powerful effects on the user, nor to deny that drugs differ in some respects from other commodities. But a wide range of outcomes typically thought to result from drug use is far more accurately attributed to the current legal treatment of drugs.

To make this case, the paper first presents an economic analysis of drug prohibition and demonstrates how drug markets under prohibition compare to drug markets under legalization. The analysis shows that many negative outcomes typically attributed to drugs are the result of prohibition, and it explains why these outcomes would be reduced or eliminated under legalization. This analysis does not by itself imply that legalization is preferable to prohibition; the analysis suggests that one effect of prohibition is reduced consumption of drugs, and under some views this is a desirable outcome. The analysis simply makes clear that some features of drug markets and drug use are the result of drug prohibition--independent of the physical or pharmacological properties of drugs--and it provides a framework for thinking about the consequences of alternative policies.

The second part of the paper discusses the conditions under which drug prohibition is likely to be the right public policy response to the negative outcomes that can accompany drug use. Since most effects of prohibition are undesirable, the main potential benefit of prohibition is any reduction in drug consumption relative to what would occur under legalization. I discuss different perspectives on drug consumption and how these relate to the virtues, or not, of prohibition. The discussion explains that standard arguments used to justify policies to reduce drug consumption are less compelling than commonly asserted, even though drug use causes substantial harm in some cases. The discussion also explains that, even if reducing drug use is an appropriate public policy goal, other methods for reducing drug consumption are available that potentially achieve a better balance between the harms of drug use and the harms of drug policy.

The paper's third section discusses alternatives to prohibition and legalization, such as sin taxation, subsidized treatment, medical provision of drugs, needle exchanges, and public health campaigns. Many of these policies can and do coexist with prohibition or legalization, but they are distinct policies that require separate analysis. I show that each policy has positive and negative aspects, and that evaluation of each depends on views about drug consumption and on relevant evidence.

II. The Positive Analysis of Drug Prohibition

In this section I present what economists refer to as a "positive" analysis of prohibition, meaning one that describes the effects of prohibition without addressing whether those effects are good or bad. To conduct such an analysis, one must compare prohibition to a particular alternative; here I assume the alternative is the policy currently applied to most goods, namely, legalization. Under legalization, drug markets would be subject to standard tax and regulatory policies, but these would be no different than those for coffee or ice cream. There are many alternatives to prohibition besides legalization, such as sin taxation and subsidized treatment; I abstract from these here for simplicity but discuss them explicitly in section IV.

The Demand and Supply of Drugs under Prohibition and Legalization

The starting point for analyzing drug prohibition is the observation that drugs continue to be supplied and demanded despite prohibition. This point might seem obvious, but it bears repeating because so many policies, statements by politicians, and even scientific analyses assume that what happens under a law is whatever that law directs. Yet abundant evidence from prohibitions of drugs, alcohol, gambling, prostitution, and other commodities demonstrates that a sizeable fraction of the population continues to supply and demand commodities that are prohibited. Thus, drug prohibition creates a black market in drugs rather than eliminating drugs.