Working Paper: NBER ID: w10976
Authors: Gary S. Becker; Kevin M. Murphy; Michael Grossman
Abstract: This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs.
Keywords: illegal goods; drug economics; law enforcement; taxation
JEL Codes: D00; D11; D60; I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased enforcement (K42) | Drug consumption (I12) |
| Increased enforcement (K42) | Total resources devoted to illegal activities (K42) |
| Elasticity of demand (D12) | Effectiveness of enforcement (K40) |
| Optimal public expenditures on enforcement (H76) | Social value of drug consumption (D16) |
| Legalizing and taxing drugs (H29) | Reduction in consumption (D12) |
| Structure of legal versus illegal markets (P37) | Consumption patterns (D10) |