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Market & non-market policies for managing dangerous drug use

Economists are naturally interested in markets for licit and illicit drugs.  This market-based view of drug issues is a plausible way of looking at society-wide drug issues since both licit and illicit drugs are sold in markets and the market-based approach permits an assessment of both direct and indirect consequences of policies in terms of buying and selling behavior as well as actions by government.   A distinction arises  between whether or not the market is a legal institution or not but it is still a market.  Even if it isn’t legal such an institution will still typically arise whenever there are willing buyers and suppliers of a drug.  With illegality however there are significant costs in seeking to prohibit transactions in drugs by prosecuting buyers and vendors.

Ethical principles in medicine, such as the Hippocratic oath, provide a good basis for ethical delivery of medical services to individuals but make much less sense if there are external social costs consequent on the actions that benefit individuals.  Providing free heroin to an addict might improve that addict’s welfare but still disadvantage society if it led to greater heroin use overall.  The individual addict might be better off with legally-supplied heroin but any new pool of users who might emerge as a consequence of legalization would be better off not using at all rather than using it legally.  Economics, by looking at market-level drug consumptions, captures such effects. Confusion of individual and aggregate effects of a drug policy is an instance of the fallacy of composition and needs to be scrupulously avoided.

People who initiate drug use are almost always young and experiencing a phase of their life where there brains and social intelligence are developing rapidly.  They experiment with different lifestyles and engage in various forms of risky behavior. There are much better ways of taking risks and preparing yourself for adulthood than taking drugs.  That is partly an ethical judgment on my part but also partly a practical position based on the clear negative possible consequences of illicit drug use.  Use of all illicit drugs is unwise and cigarette smoking is probably even more damaging to health than the use of many illicit drugs.  By the way, in the interests of openness, I point out that I do drink alcohol (and sometimes excessively) but somewhat hypocritically I also oppose the Australian booze culture.  This hypocrisy is irrelevant to assessing the dangers of drug use – that I might make mistakes provides no intellectual justification for others to do so.

Australians overwhelmingly disapprove of illicit drug use and cigarette smoking.  For example, according to a recent opinion poll 2/3 of Australian voters oppose moves to decriminalize illicit drug use.  Most Australians share my conservative views on drug reform.

The major drug problem in Australia today is cigarette smoking.  Smoking has been substantially cut over the years through the use of tobacco excises, bans on smoking in public places and cars, and advertising bans  (electronic and print media, point of sale, packaging) . The recent ‘plain packaging’ legislation should further reduce smoking by making it even less attractive to youth.  The proportion of smokers aged 14+ was 29% in 1993 and it is 18 per cent today.  Smoking among youth has declined strongly and the average age of initiating smoking has increased over the past few years.  Despite high absolute levels of residual smoking the achievement of reducing the proportion of the population smoking is a major victory for public health.

Measures against the toxin alcohol have been less successful with a 80 per cent of 14+ people drinking although per capita consumption of pure alcohol has at least stabilized over recent years with wine products displacing beer to some extent. There is still a pervasive youth drinking problem and serious problems of very heavy drinking and alcoholism. This is socially costly but much less so, in health terms, than cigarette smoking.   Moderate drinking probably does not contribute significantly to ill health – claims that it improves health are probably fiction – but there are arguments for encouraging moderation with respect to drinking alcohol whereas there are no such arguments for moderate levels of smoking.

Tobacco products and alcohol are sold in legal markets with excise taxes and various rules on sale restricting consumption.   Crucially here excise taxes both express society’s disapproval of consuming these drugs and internalize the externalities associated with their use.  There are limitations on the use of such taxes since, for example, non-internalized health costs are low relative to the tax revenues generated by tobacco.  These can be justified by internality arguments – the poor judgments that youth make in initiating this stupid habit.

There are also unsought consequences of very high tobacco taxes in encouraging illegal production of tobacco products – ‘chop-chop’ – and in encouraging the intensification of smoking – smoking hard and right up to the butt can cause carcinomas deeper in the lungs. Both of these responses to high taxes impose extra health costs on the smoker.

Thus my assessment is that market-based control of two major licit, but dangerous, drugs has been a success though not a uniform success. The record on tobacco has been good but with almost 1 in 5 adults still smoking it is remains a high priority policy problem.  Alcohol consumption is more difficult to regulate because low levels of use can be socially benign.  Moreover drink driving catastrophes are best addressed by penalizing the activity of driving when one has drunk excessively rather than penalizing alcohol consumption alone.

Many of the illicit drugs addressed by public policy are used by a smaller fraction of society and are less entrenched as patterns of behavior.  We can learn something about appropriate management strategies for currently illicit drugs by considering the policy experience with licit drugs.

The production and popularization of cigarettes was a historic mistake.  Tobacco has been used for centuries but the specifically modern form of tobacco consumption, cigarettes, only became popular in the 1920s.  Consumption occurred only for a few decades before it was understood, in the early 1950s, that a historical mistake of catastrophic proportions had been made. Reversing that mistake has proven to be a difficult task because of commercial tobacco interests and the dependence of the public sector on tobacco excises.  Like alcohol too, cigarette consumption has become a firmly entrenched part of social life.

At a minimum this experience motivates caution in advocating the legalization of drugs that are potentially habit forming and which have serious health impacts.  That we have made mistakes in the past is not a reason to continue making them.  A smart society should learn from its mistakes not interpret them as precedents which provide a logical basis for more mistakes.

Illicit drugs are sold in markets but the markets are illegal. Generally purchasing in such markets is subject to penalties as is selling.  There are several issues here. Should buyers, sellers (or both) be subject to penalties?  Are the costs of prohibition justified in terms of the avoided social damages that would occur in legal markets with taxes expressing society’s disapproval of the drugs?

The costs of prohibition are high. There are the costs of policing the prohibition and of maintaining the criminal justice system. There are costs to drug users of paying high prices and the costs to the community of drug-related crime such as property theft.  It is difficult to put figures on such costs but Collins and Lapsley estate the 2004/05 costs of illicit drug use in Australia at about $8b which is 14.6% of the total gross costs of drug use in Australia or something less than 1% of GDP. These are gross costs that include costs born by participants themselves.  They are not a measure of the net additional costs that would result from not having legalized provision with appropriate excise taxes in place.

In particular these costs do not net out the future benefits that result from society expressing its strong disapproval of current illicit drug use.  It is also difficult to gauge this benefit since one is faced with the problem of evaluating a counterfactual – what would costs have been in the future if drug use had been decriminalized?

My guess is that the benefits of prohibiting sale of key illicit drugs exceed costs simply because legalization would promote expanded use because both prices of use and more generally ‘user costs’ (social acceptability, freedom from legal sanction, convenience) would come down markedly.  Economists of all persuasions believe that demand curves invariably do slope downwards!

Consider two illicit drugs – heroin (a nasty) and cannabis (supposedly a soft drug).

Heroin is an addictive drug that creates the potential for overdose deaths and for a life whose comfort is contingent on continued supply.   Addictiveness here is a primary argument against permitting use.  Such addictions can resolve into permanent abstinence but, for many addicts, there are life long cycles of remission followed by resumption of use.  The demand for heroin is quite price-elastic according to Saffer and Chaloupka (1995) the elasticity is around -1.7 so a 10 per cent increase in price will lead to about a 17% decrease in use.   Participation elasticities are a little less than -1 so the same price increase leads to a less-than-proportionate decrease in the number of users.  There is strong evidence in Australia that making heroin difficult to obtain does decrease use. Despite utterly disgraceful denials from pro-drug members of the official drug industry, the ‘heroin drought’ in Australia in year 2000 did substantially reduced heroin use, almost eliminated overdose deaths and substantially reduced drug related crime (Weatherburn, 2009).  It was a tribute to the success of interdiction efforts that, by substantially increasing the price of heroin, reduced the private and social costs of heroin use.

Attempts by sections of the drug industry – those who depend on securing addicts to preserve their livelihoods by minimizing the lessons learnt from the ‘heroin drought’ are a scandal that almost defies belief. The war on illegal drugs (like the war on cigarettes) never failed. It has, in fact,  been highly successful.

The suggestion that medically supplied heroin should be provided free to addicts would be disastrous for drug control efforts because of the impact it would have in reducing heroin prices for new users.  Addicts currently demand the bulk of street supplied heroin and the withdrawal of their demand would lead to a price collapse that would spur experimentation and eventual addiction by new users.  Not only would the new users face lower costs of experimentation, they would also face a more friendly environment should they become addicted.

While most in the community support continued stringent policies on heroin use and on the use of front-brain stimulants such as cocaine and meth/ice the case for continuing to prohibit cannabis use is more contentious.  Some see cannabis as a safer alternative to alcohol.  I do not agree particularly with respect to the new stronger variants of cannabis available.

Smoked marijuana is unsafe for much the same reason smoking tobacco is unwise – there are similarities in smoke composition between tobacco and cannabis.  It does sometimes provoke psychotic reactions requiring hospitalizations and it is associated with high levels of drug use dependence.  Iverson (2008) estimates that between 10-30% of marijuana users become dependent on the drug with 9% seriously so.  A 2007 report suggests that in the US more people are admitted to clinics for use of marijuana than for heroin, cocaine and methamphetamines combined (here).  Koob and Moal’s seminal; text, Neurobiology of Addiction is unambiguous on the cannabinoid class of drugs – 10 per cent of those who have ever used cannabis become daily users which corresponds to measured rates of substance dependence.  Tolerance to the drug increases and withdrawal symptoms are experienced on cessation of use. Chronic users display a range of symptoms of psychopathology – such as mild depression – which resolve when use discontinues.

There is also significant, though not completely convincing, evidence that marijuana can act as a ‘gateway drug’ for use of more damaging illicit drugs.

A risk adverse society that values the mental health of its youth should not legalize marijuana even if the gateway theory is incorrect.  Given the possible health costs it is just a far too risky strategy to suggest legalizing it or as one prominent medical doctor has suggested, making it available at local post offices.

What do we want with respect to drug policies?  The ultimate objective is educational.  People must come to see people who rely on illicit drugs such as cannabis and heroin as losers.  They are not romantic figures at all – there is no ‘heroin chic’ and the sad junkie who has robbed homes or ‘hawked their fork’ on the street is someone to be pitied not treated as a knowledgeable advisor.  People who smoke cigarettes are fools who reject the evidence of modern science.

People can get high – really high – doing lots of things that do not involve drugs.  Sometimes I can do it hitting a golf ball really well while others do it through surfing or other sporting activities.  Others too do it through an appreciation of the arts or mathematics.  People can and should try to appreciate life in all its richness and that will quite inevitably involve experiencing feelings of sadness and even depression.  Successful people learn to deal with life in its broadest respects without relying on drugs.  They are the heroes not those who cannot cope with life’s ups-and-downs and who need to use drugs.

5 comments to Market & non-market policies for managing dangerous drug use

  • fxh

    The demand for heroin is quite price-elastic according to Saffer and Chaloupka (1995) the elasticity is around -1.7 so a 10 per cent increase in price will lead to about a 17% use.

    I think you mean 17% DROP in use? The drop got deleted.

  • fxh

    People can get high – really high – doing lots of things that do not involve drugs. Sometimes I can do it hitting a golf ball while others do it through surfing or other sporting activities. Others too do it through an appreciation of the arts or mathematics. People can and should try to appreciate life in all its richness and that will quite inevitably involve experiencing feelings of sadness and even depression. Successful people learn to deal with life in its broadest respects without relying on drugs. They are the heroes.

    This is a common misconception Harry – That all drug users, and particularly addicts, are getting high. Somehow attaining pleasure without working for it.

    The vast majority of “addicts” of any drug are using the drug to avoid sometimes crippling pain, either psychic or physical, and to “get normal” for want of a better word.

    The definition of the “problem” depends on the lense used to look at it.

    The self medicating lense leads to a different formulation of the problem and thence to different solutions.

    That said – there is an absence of thoughtful economic/market based analysis on all sides. Your stuff is a good contribution.

  • hc

    FXH, Thanks for picking the typo.

    I agree with your comment – but using drugs is often an attempt to avoid fear and neurosis. I appreciate those fearful individuals who face up to life’s difficulties.

  • fxh

    harry – I think you know where this is going. You make a moral argument – a lack of character argument.(surely then the solution is a moral fix – religion perhaps?)

    But what about the hard nosed A/Prof from say, a proper discipline such as Chemistry, who downs a bottle of Heathcote Red every night – all 7.6 standard drinks of it?
    Compared to say the bearded A/Prof in Post Modern Poetry who rolls a joint every night to listen to, say, his favourite Grateful Dead Live album?

    Which one is attempting to avoid fear and neurosis. Which one is a fearful individual facing up to life’s difficulties.?

  • conrad

    Actually, unlike what you and many other economists seem to think here, the data on what causes drug use is very hard to determine and quite culturally specific. Drugs are comparatively very expensive in Australia, for example, but we have a population that takes comparatively high amounts of them, including bad brain-damaging ones like ecstasy. This suggests that the biggest factors are non-economic ones, and thus things like supply concerns are basically causing huge amounts of money (including time on reports and stuff) to be spent on what amounts to picking at the edges of the problem.

    My suggestion is that we should have small-scale decriminilization of the less dangerous drugs that we have drug-driving tests for. Apart from policing, this would have the the immediate benefit of allowing less dangerous forms to be available (e.g., pot as vaporized THC versus smoked).
    We could then see what effect reducing the prices really has and the money saved could be used on better things like harm-reduction, as is and has been done successfully for tobacco. I believe pot, for example, is mainly bad in terms of cancer risks which could easily be reduced by better and not worse availability, and the risks of psychosis appear to be restricted to young users (i.e., it’s bad from brain development, but doesn’t do much once critical times have been passed — there is an expert at Melbourne U/Howard Florey whose talk you should go to if you are interested in knowing the real medical data). If use skyrockets, obviously we could re-ban it.

    Also, your suggestion about heroin is controversial — the reason there are less over-doses in heroin droughts is complex, but two things that are not to do with price are (1) the “coolness” of the drug is cyclical — at the end of an epidemic people get used to seeing people vomiting on themselves etc. and it just doesn’t look like fun (the same is true of other drugs like pot and ecstasy, which also go in and out of fashion, and no-doubt crystal meth will also), and (2) when the market gets over-supplied, quality goes up, so what’s causing overdose isn’t availability, but people getting a much higher dosage than they expect.

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