The U.S. government's focus on supply reduction efforts in its "war on drugs" has been relatively unsuccessful at addressing illegal drug use
Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example, through drug education and voluntary treatment programs for addicts.
a. What will happen to the equilibrium price, quantity, and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine?
b. Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine. As a result of the reduction in supply the price of cocaine increases by 25 percent. If the price elasticity of demand is -0.5, what is likely to happen to the incentive to sell cocaine?
c. Based on your answers, explain why one approach might be preferred over the other.
a. A decrease in demand will lead to a decrease in price, quantity, and total revenue. Reduced revenue is likely to deter drug trafficking.
b. The increase in price increases revenue when demand is inelastic; this will increase the incentive to sell cocaine.
c. If people respond to incentives, the government will have more success is reducing cocaine consumption if it uses anti-drug programs that concentrate on reducing demand rather than programs that concentrate on reducing supply.
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