Vice Squad
Tuesday, January 18, 2005
Becker, Murphy, and Grossman on Drugs

The founders of rational addiction theory, University of Chicago economists Gary Becker and Kevin Murphy, along with economist/vice policy researcher Michael Grossman of City University of New York, have released "The Economic Theory of Illegal Goods: The Case of Drugs" as an NBER working paper. (We used an earlier version in my Vice class last year.) I'll oversimplify tremendously: They note that drug prohibition acts somewhat like a tax, raising the effective price to consumers of procuring illegal drugs. But it is a clumsy tax, one that doesn't garner revenue for the government -- indeed, it costs the government a good bit of money to maintain the very-leaky prohibition. They then show under what conditions we would be better served by replacing the clumsy prohibition tax with a standard tax on legalized drugs, a tax that actually does raise revenue. The conditions under which the "legal but taxed" alternative is better seem to be fairly broad, so they eventually ask, why do we have drug prohibition? They suggest that it has to do with distributional consequences. Under prohibition, the effective price of drugs (including such factors as ease of making a reliable connection and consequences of an arrest) is lower for low-income, inner-city residents than it is for the middle class, whereas with legalization, the effective price would be the same for everyone. So even though the average effective price under legalization can be higher than it is under prohibition, the middle class might suspect, and rightly, too, that the effective price of drugs for their kids might fall with legalization. (Vice Squad has touched upon this theme in the past.) But I haven't done justice to the paper, which looks at many other issues than those I have mentioned.

Professor Becker's homepage provides another source for the paper.

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