Vice Squad
Monday, October 20, 2003
A Bit More on Drug Pricing

Professor Michael Alexeev of Indiana University's economics department has written in about
my warning against immediately interpreting lower drug prices as evidence of the failure of the
drug war to reduce supplies. My claim was that quantity or prevalence information is also needed
(sometimes "availability" is assessed via surveys, such as, "is marijuana easily available in your high
school?"), because lower prices could be due to decreased demand, not increased supply. Prof.
Alexeev notes that in any case, we would not expect the price to be below "marginal cost," as in
any market. So, if the market for illicit drugs is more-or-less competitive, and assuming (as seems likely)
that the marginal costs of supplying drugs are not steeply rising, the radical reductions in price noted
by Prof. Kleiman
should be a very good indicator of the effectiveness of the interdiction effort.

(Economistas will recall that in a perfectly competitive, constant-cost industry, marginal costs of
supply are constant and equal to the equilibrium market price.)

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