Supply Demand And The Market For Drugs Economics Essay

Supply Demand And The Market For Drugs Economics EssaySupply-side initiatives are actions meant to cut or overthrow the add on by preventing medicines from entering the country. A planning decline, unless(prenominal) it totally eliminates the flow of doses into the grocery, works by raising wrong so that aspiration is cut. A decrease in turn in, without a change in want, allow for result in a new trade equilibrium where the market wrong is high , solely the sum of money of drugs bought and sold is trim down. However, the critical factor that determines the magnitude of the changes in expense and quantity is the springlikeity of invite.Two concerns hurt emerged with regard to drug publish restriction in the context of an price- dead entreat. First, it has been observed that lower-income addicts who cannot substitute forward from the drug after the price increase tend to resort to minor crimes to support their habit. Second, addicts who have to reduce purchase s tend to adopt the faster, but riskier, route of induce euphoria by injecting the drug. A policy-maker must be aware of these potential consequences.Clearly, therefore, if both sum up-side and demand-side initiatives are priceless, well conceived demand decline efforts (i.e., schemes to prevent drug iniquity by the young through prevention, education, rehabilitation of existing drug users) promise an unam declamatoryuously unequivocal outcome relative to efficacious publish restrictions where there may be an offsetting expenditure effect arising out of the price increase (i.e, when the demand for drugs is inelastic, 0 -1, D2 , or perfectly elastic, =0, D1 y=1000).As shown in panel (a) in estimate 1, a vertical demand crimp is perfectly inelastic at every price. If the price goes up, the quantity demanded is unchanged (), so the snapshot of demand must be zero (A demand curve is vertical for essential goods goods that people feel they must have and ordain pay anythi ng to get. In our case (i.e., drug addicts), the demand curve for drugs could be vertical at a days dose, Q*=1000. More realistically, an individual drug addict may have a demand curve (panel (b), Figure 1) that is perfectly inelastic only at prices below p*, the maximum price he can soften to pay. Because he cannot afford to pay more than p*, he buys nothing at high prices. As a result, his demand curve is perfectly elastic up to y* doses at a price of p*.In Figure 2, the demand for drugs is shown by the downward-sloping demand curve (D2) to reflect the ban relationship between price and the quantity demanded. It has been drawn with a steep slope because it is commonly held that addiction suggests price inelasticity in the demand for drugs, If true, it implies that an increase in price will be accompanied by a less-than-proportionate decrease in the quantity demanded. The supply curve (S), on the other hand, mirrors the behaviour of drug suppliers. It is drawn with a positive sl ope since higher prices will attract enormousr quantities from suppliers and vice versa. Moreover, the value of the elasticity coefficient (1) suggests that the supply is price elastic olive-sized increases in the price of drugs are thought to draw a more-than proportionate increase in the quantity supplied.As shown in both Figure 1 (panel a) and Figure 2, the initial equilibrium is represented by point e, where price is established at p* and the quantity transacted is y*. For a supply reducing shown by S, the demand reduction must be at least as large as that represented by D2 and D1 in nightclub for price to remain at its master direct of p*. This is to ensure that the quantity transacted falls (to y*) without any increase in price. If supply reduction keeps the price high enough (at p*) and long enough to prevent a new generation from falling victim to the habit, demand may fall in the long run and succeed in lowering usage and drug-related harms. Moreover, the twin receip tss of a lower price and lower quantity transacted will only be obtained if demand reduction exceeds supply reduction, as illustrated by point f. Even so, the continued presence of drug sales and use, although at a lower scale, suggests that a drug- abandon society has not been achieved. However, the evidence everywhere suggests that this goal remains a dream (Wood et al. 2009).In sum, the net benefit from attempting a pure supply reduction of drugs remains ambiguous if demand is price-inelastic (in our case, D1 y=1000 and D2 ). Thus, by found synchronous initiatives on both the supply and demand sides might fasten an unambiguously positive net result, that is reduce the consumption of drugs.G2 A reduction in the drug-induced crookity Pure Demand-side initiativeDemand-side initiatives attempt to reduce the demand for drugs at all prevailing prices or, in purely graphically terms, switch over the entire demand curve to the left of its original position. Schemes to prevent drug abuse by the young through prevention, education, rehabilitation of existing drug users, minimisation of relapses among rehabilitated users and affirmled and supervised substitution therapy, meant to deprive users a management from harmful drugs, constitute some of the commonly use demand reducing measures.As depicted in both Figure 3 and Figure 4 above, starting from the initial equilibrium (e), I move supply remains unchanged. A successful demand reduction will shift the demand curve leftwards (D2), do it to intersect with the abandoned supply curve at a lower price (p*). The new lower demand curve, D2, intersects with the original supply curve (S), resulting in a lower price (p*) and a lower quantity bought and sold (y*). The total expenditure on drugs is cut down as well, providing less incentives for drug-induced criminality or drug substitutions.The elasticity of supply this instant determines the relative magnitude of the movement in price and quantity. The more elastic (inelastic) the supply, the smaller (larger) the decline in price and the larger (smaller) the decline in consumption (i.e, drug-induced criminality) induced by a given demand reduction. Nevertheless, both variables move in the same direction.G3 A reduction of the emergence of nonionized crime commit with the (illegal) sale of drugs Demand-side and/or Supply-side initiativesIn the case of an inelastic demand and a elastic supply, the options for achieving a drug-free society are illustrated in Figure 5 above. Point e, as before, represents the equilibrium price and quantity before the anti-drug campaign.A purely demand-reduction effort to reduce drug art (and consumption) to zero requires a big reduction in demand in order to shift the demand leftward to a point like f, where the lower demand curve (D2) intersects with the existing supply curve (S) and yields a street price (p*) that is so low that it is no longer remunerative to supply drugs at all. In other words, the drug tr ade is wiped out due to insufficient demand.Alternatively, a purely supply reduction initiative to eradicate both the drug trade and consumption requires a red-blooded supply shift leftwards to a point like g, which yields a price so high (p*) as to make the drugs beyond the reach of buyers.Finally, a simultaneous shift leftward of both the demand and supply curves (arising from very effective supply and demand reduction initiatives) could, theoretically, see the reduction of the drug trade and consumption (and severally a reduction of the emergence of organized crime committed with the (illegal) sale of drugs) at a price level that lies between the two extreme limits of p* and p*. Such a situation is shown by point h, where the highest price offered by the drug user (p*) is just below the threshold price (p*) considered profitable by the supplier.Moreover, the three options from above could be applied as well in the case of a perfectly inelastic demand in order to reduce the drug trade (and consumption) and respectively, to reduce the emergence of organized crime connected with the illegal sale of drugs. However, the drug-free society cannot be achieved (Figure 6).To summarise, price elasticities of demand and supply play a key role in determining the magnitudes of change in price and quantity induced by supply-side and demand-side initiatives. As noted, a pure supply reduction lowers consumption but increases price and, unless demand is very price-elastic, the reduction in consumption will be small but the total expenditure on drugs will increase considerably. On the other hand, a pure demand reduction lowers both price and quantity, with supply elasticity determining the relative size of the decline in both variables (additionally, consumption and expenditures on consumption will also be lower relative to the original level). In addition, whether an extreme purpose of taking both demand-side and supply side initiatives is worth pursuing will depend upon how much it costs society to do so. If large shifts in demand and supply can be achieved at relatively low cost, a drug-free society is indeed a grand goal.b)The interpretations given to G1, G2 and G3 above looked at supply and demand shifts, ignoring costs. In deciding on an optimal policy, defined as one that maximises social welfare, costs buy the farm very important and must be weighed against the expected benefits. To be more precise, social costs must be weighed against the social benefits expected from a chosen policy option.P1 Increased punishment and/or change magnitude probability of getting caught for drug-pushersTo the extent that drug consumption transmits a negative externality, the social marginal benefit (SMB) from drug use must lie below the private marginal benefit (PMB), as reflected by market demand curve (D2, and D1 respectively) in Figure 7 and Figure 8 below. Assuming no externalities on the supply side, the market supply curve (S) reflects the cost of pr oducing and distributing drugs. In a market without restrictions on drug supply or demand, the level of drug consumption (y*) will exceed the socially optimum level (y*).Enforcement on the supply side (i.e., increased punishment and/or increased probability of getting caught for drug-pushers) will reduce the market supply (shift the curve leftwards to SE), rise up the price to p* and reduce drug consumption to the socially optimal level of y*. The after-enforcement supply curve will now incorporate the additional costs incurred by illegal suppliers to quash detection and punishment (area abcd in Figure 7 and Figure 8).If demand is inelastic (D2 in Figure 7), the reduction in drug consumption will be small and the gain in social welfare from avoiding the negative externality associated with drug use will also be small. This gain is shown by the shaded area marked def (Figure 7). It is clear that these additional costs (area abcd) exceed the additional gain from reducing consumption (area def). However, by reducing consumption to y* via supply enforcement, society avoids the net loss shown by the def area.If demand is perfectly inelastic (D1 in Figure 8), despite the reduced consumption induced by the higher price (from p* to p* since an individual drug addict cannot afford to pay more than p*, he buys nothing at higher prices, p*) due to a supply enforcement, total expenditure on consuming drugs will increase (area abce). This increased spending by persistent users translates directly into higher revenues for drug suppliers who remain in business.Hence, if the demand is inelastic (D2), or perfectly inelastic (D1), the total spending on drug consumption and the total resources committed to supplying drugs will increase. Thus, supply reduction under these circumstances has the unintended effect of drawing more of societys resources into an activity (illegal sale of drugs) that is being discouraged.Moreover, the impact of supply enforcement is also influenced by the price elasticity of supply in general, the lower (higher) the supply elasticity, the smaller (larger) the effect of a given increase in enforcement in raising price and lowering consumption. Thus, the lower (higher) the price elasticity of supply, the greater (smaller) the enforcement costs and the likelihood of reducing the net social gain.In sum, if the demand for drugs is inelastic (D2) or perfectly inelastic (D1), supply enforcement may not be an efficient method of achieving the optimum level of consumption. This is because the cost of additional resources committed by the society (i.e., the additional expenditures by drug dealers plus the costs of supply enforcement) towards achieving this end will far exceed the benefits to the society.P2 Legalize the sale of drugsThe effect of a supply restriction can be reproduced with a clear improvement in welfare by legalizing drug return and imposing an excise value to reduce consumption to the optimal level. This is illustrated in both Figure 9 and Figure 10 below.In the case of inelastic demand, (D2 in Figure 9), presumptuous drug supply is legalized, the pre-intervention price and consumption are shown, as before, by p* and y*, respectively. inhalation can be reduced to the socially optimal level, y*, by imposing an excise tax equal to cd per unit of output. This raises the cost of production and the after-tax supply curve is indicated by ST . The market price of drugs increases to p*, consumption falls to y* and, as in the case of supply enforcement, net social losses ( resembling to def) are avoided. However, in contrast to supply enforcement, the tax extracts resources from the drug industriousness equal to the value of abcd. The effects of this reduction in resources are borne by both consumers and producers the former, via a higher price and lower consumption rate, and the latter, by way of lower price and output. The resources are transferred to the government and will (hopefully) fund activities with a higher net social value.Of course, the suppliers and consumers do not necessarily bear the tax burden equally. The more inelastic the demand, the greater is the trade of tax borne by the consumers. Similarly, the more inelastic the supply, the greater is the tax share borne by the suppliers. This point is better appreciated by looking at the equivalent estimate of the revenue collected, shown by the area marked p*cdp*. epoch the tax raises the consumer price from p* to p*, it lowers the unit price received by suppliers from p* to p*. Thus, in this example of inelastic demand, consumers pay a bigger share of the tax (area p*cdp*), relative to suppliers (area p*gdp*).In case of perfectly inelastic demand (D1 in Figure 10), Consumption can be reduced to the socially optimal level, y*, by imposing an excise tax equal to ce per unit of output. This raises the cost of production and the after-tax supply curve is indicated by ST . The market price of drugs increases to p* and cons umption falls to y*. However, in contrast to supply enforcement, the tax extracts resources from the drug industry equal to the value of abce. The effects of this reduction in resources are borne by both consumers and producers the former, via a higher price and lower consumption rate, and the latter, by way of lower price and output. Of course, the suppliers and consumers do not necessarily bear the tax burden equally. This point is better appreciated by looking at the equivalent estimate of the revenue collected, shown by the area marked p*cep*. While the tax raises the consumer price from p* to p*, it maintains the unit price received by suppliers at p*. Thus, in this example of inelastic demand, consumers pay a bigger share of the tax (area p*cdp*), relative to suppliers (area dce).The net increase in welfare under the legalise-and-tax approach is assured because the tax, in effect, internalises the negative externality associated with drug consumption. Furthermore, apart from g enerating tax revenue, the resources necessary to discourage illegal production and control tax avoiders will be far smaller than the enforcement costs under a regime where all production is illegal. The authorities only have to raise the cost of illegal production above the cost of legal production to discourage the former.Despite the theoretical elegance of this approach, governments swerve to adopt it because it is seen as morally wrong to legalise drug use, even if the longer-term objective is to restrain consumption more effectively.P3 Distribute drugs for freeIf the government were to distribute the drugs free (p*=0), the quantity would be y*=1000 when demand is perfectly inelastic (D1), and y*=2000 when the demand is relatively inelastic (D2). As depicted in both Figure 11 and Figure 12 below, starting from the initial equilibrium (e), I assume supply remains unchanged.In Figure 12, a successful demand reduction would be possible only in the case of perfectly inelastic dema nd curve, (from D1 to D1), causing it to intersect with the given supply curve at a lower price (p*). The new lower demand curve, D2, intersects with the original supply curve (S), resulting in a lower price (p*) and a lower quantity bought and sold (y*). The total expenditure on drugs is reduced as well, providing less incentives for drug-induced criminality or drug substitutions. However, the drug trade (and consumption) could not be reduced to 0.Furthermore, in Figure 11, in the case of inelastic demand (D2), the consumption is more likely to increase than to decrease. The implementation of a policy such as distributing drugs for free, will increase the quantity from y* (equilibrium quantity) to y*=2000 and reduce price from p* (equilibrium price) to p*=0.P4 Decrease the demand for drugsAs discussed earlier in the musical composition regarding policy P1, the social marginal benefit (SMB) from drug use must lie below the private marginal benefit (PMB), as reflected by market dema nd curve (D2, and D1 respectively) in Figure 13 and Figure 14 above. Assuming no externalities on the supply side, the market supply curve (S) reflects the cost of producing and distributing drugs. In a market without restrictions on drug supply or demand, the level of drug consumption (y*) will exceed the socially optimum level (y*).In both Figure 12 (and Figure 13), scene efforts to reduce the demand for drugs are unaffected by the price elasticity of demand. roaring persuasion will result in the original demand curve, D2 (and D1) declining to D0. This will raise the overall social welfare, provided the costs of such efforts are not excessively large and if persuasion itself does not generate a large negative social value.As to sum up, the analysis of the optimal policy-instruments to be implemented on the market for drugs supports the conclusions of the earlier interpretations (G1 to G3) when the impact of a policy on welfare is considered explicitly, demand reduction delivers a clear improvement in outcome whereas supply reduction requires special conditions to do so.c)GoalsG1 Reduction in the consumption of drugsG2 A reduction in the drug-induced criminalityG3 A reduction of the emergence of organized crime connected with the (illegal) sale of drugsPolicy-instrumentsP1 Increased punishment and/or increased probability of getting caught for drug-pushersD1, SD2, SD1, SD2, SD1, SD2, SBy launching simultaneous initiatives on both the supply and demand sides might guarantee an unambiguously positive net result, that is reduce the consumption of drugs.If the demand for drugs is inelastic or perfectly inelastic, supply enforcement may not be an efficient method of achieving the optimum level of consumption. Well conceived demand reduction efforts promise an unambiguously positive outcome (i.e., less incentives for drug-induced criminality) relative to effective supply restrictions where there may be an offsetting expenditure effect arising out of the price inc rease.A simultaneous shift leftward of both the demand and supply curves (arising from very effective supply and demand reduction initiatives) could, theoretically, see a reduction of both the drug trade and the organized crime related with the (illegal) sale of drugs). However, a drug-free society cannot be achieved.A simultaneous shift leftward of both the demand and supply curves (arising from very effective supply and demand reduction initiatives) could, theoretically, eradicate the drug trade, and respectively , the organized crime connected with the (illegal) sale of drugs), thus achieving a drug-free society.GoalsG1 Reduction in the consumption of drugsG2 A reduction in the drug-induced criminalityG3 A reduction of the emergence of organized crime connected with the (illegal) sale of drugsPolicy-instrumentP2 Legalize the sale of drugsD1, SD2, SD1, SD2, SD1, SD2, SGovernments hesitate to adopt this policy because it is seen as morally wrong to legalise drug use, even if the lo nger-term objective is to restrain consumption more effectively.To the extent that legalizing drugs would make them cheaper, it would create many new addicts and the incidence of drug-induced crime would increase. Thus, legalizing drugs not only does not decrease criminal behaviour almost certainly, it would spur its increase.If there are any regulations or taxes of (for example, an excise tax)placed upon the legalized drugs, the emergence of organized crime, most certainly, will not be reduced.Governments hesitate to adopt this policy because it is seen as morally wrong to legalise drug use, even if the longer-term objective is to restrain consumption more effectively.GoalsG1 Reduction in the consumption of drugsG2 A reduction in the drug-induced criminalityG3 A reduction of the emergence of organized crime connected with the (illegal) sale of drugsPolicy-instrumentsP3 Distribute drugs for freeD1, SD2, SD1, SD2, SD1, SD2, SA successful demand reduction would be possible only in the case of perfectly inelastic demand curve, causing the new lower demand curve to intersect with the given supply curve at a lower price and a lower quantity bought and sold. Thus, the consumption is expected to decrease.In the case of inelastic demand, the consumption is more likely to increase than to decrease.A successful demand reduction would be possible only in the case of perfectly inelastic demand curve, causing the new lower demand curve to intersect with the given supply curve at a lower price and a lower quantity bought and sold. Thus, the total expenditure on drugs is reduced as well, providing less incentives for drug-induced criminality or drug substitutions.If one seesdrug-inducedcriminality ascriminalityunder theinfluence ofdrugs, then freedistributionwould increasedrug-related criminality.Since drugs are distributedfor free (p=0), the emergence of organized crime connectedwith the illegal sale of drugsis expected tobe eradicated.GoalsG1 Reduction in the consumption o f drugsG2 A reduction in the drug-induced criminalityG3 A reduction of the emergence of organized crime connected with the (illegal) sale of drugsPolicy-instrumentsP4 Decrease the demand for drugsD1, SD2, SD1, SD2, SD1, SD2, SPersuasion efforts to reduce the demand for drugs are unaffected by the price elasticity of demand. Successful persuasion will result in the original demand curve to decline. Thus, the consumption of drugs is reduced. However, the drug consumption cannot be reduced to 0.Persuasion efforts to reduce the demand for drugs are unaffected by the price elasticity of demand. Successful persuasion will result in the original demand curve to decline causing a reduction in drug-induced criminalityPersuasion efforts to reduce the demand for drugs are unaffected by the price elasticity of demand. Successful persuasion will result in the original demand curve to decline, causing a lower demand curve that intersects with the existing supply curve and yields a street price th at is so low that it is no longer profitable to supply drugs. In other words, the organized crime related to the illegal sale of drugs is reduced (if not wiped out) due to insufficient demand.