THE ECONOMICS OF DRUG PROHIBITION AND DRUG LEGALIZATION (Part 2)

III. The Normative Analysis of Drug Prohibition

I now present what economists call a normative analysis of drug prohibition,
meaning one that asks whether prohibition is preferable to legalization. As
a starting point, I note that most effects of prohibition are, in and of
themselves, negative (for example, increased crime, redistributions to
criminals, greater corruption, diminished civil liberties). The most
important exception is prohibition's effect on drug consumption. This effect
might not be large, and it might even be perverse (because of the forbidden
fruit effect, for example). But there is little dispute that this is the key
issue: if prohibition fails to reduce consumption, it is unambiguously
inferior to legalization. If prohibition reduces consumption, the bottom
line depends on how one views this effect and on the magnitude of
prohibition's negative consequences.

In this section I discuss four different perspectives on how public policy
might view drug consumption. I emphasize the distinction between two
questions: first, whether policy should attempt to reduce such consumption;
and second, whether prohibition is the right policy by which to achieve this
objective if the objective is sensible in the first place.

Rational Consumption

One view of drug consumption-the one assumed in the standard economic
paradigm-is that people consume drugs because they think it makes them
better off. According to this view, it does not matter whether people
consume drugs because they enjoy the psychopharmacological effects, because
they believe drugs have medicinal properties, or because they think drugs
are cool; all that matters is that they voluntarily choose to consume drugs.
Similarly, under this view, it does not matter whether drugs are addictive
or if consumption negatively affects health or productivity; if rational
people choose to accept these risks, they must think the benefits are worth
the costs.

The rational model of consumption was long believed to be inconsistent with
many observed behaviors related to drug consumption, such as addiction,
withdrawal, and relapse. Theoretical work by Becker and Murphy (1988) shows
that the rational model is potentially consistent with these phenomena, and
a growing body of empirical work has had some success in fitting the model
to data (see the discussion in Miron, 1998). This empirical work does not
prove the rational model is correct with respect to all drug consumption,
but it undermines the presumption that all drug use (or other addictive
consumption) is necessarily irrational.

If one adopts the rational model, then the normative analysis of drug
prohibition is simple: any policy that reduces drug use is a cost, not a
benefit. Thus, all of prohibition's effects are negative. If drug
consumption is not rational, the conclusion that policy-induced reductions
in consumption are a cost does not necessarily hold.

There are numerous reasons why the rational model of drug consumption
strikes many as inaccurate. No doubt there are some individuals for whom
this description is not even close. But it is hard to deny that at least
some drug use fits the rational model. Many people claim to enjoy the high
associated with marijuana consumption; others value the pain relief or
mental calm produced by opiates; still others appreciate the stimulation of
cocaine. An objective evaluation of prohibition, therefore, should include
as one cost any reduction in rational drug consumption.

Externalities

A second perspective on drug consumption holds that even if drug consumption
is rational and thus a benefit to the person who consumes drugs, such
consumption might harm innocent third parties (in the vocabulary of
economics, cause externalities) and thus be excessive from society's
perspective. Although conventional accounts often exaggerate the magnitude
of drug-consumption-induced externalities (see Miron and Zwiebel, 1995;
Miron, 1998), it cannot be disputed that these are significant in some
cases. For example, drug consumption can impair one's ability to drive or
operate machinery safely; it can have negative health effects on the fetus;
or it can cause additional use of publicly funded health care.

The mere existence of externalities, however, does not by itself justify
policies to reduce drug consumption; one must compare the magnitude of
externalities to the costs of the policy, including any unintended
consequences. The analysis in section II, for example, shows that
prohibition itself generates externalities, including increased crime and
corruption, the spread of HIV, and reduced civil liberties. Even if the
externalities from drug consumption are substantial, they might be smaller
than the externalities from policy. This is especially true if the policy in
question has only modest effects on drug consumption.

In addition, the ability of policy to reduce drug-related externalities is
limited by the fact that reduced drug use might translate into increased use
of other substances that have similar if not greater externalities. For
example, marijuana appears to impair driving ability substantially less than
alcohol (U.S. Department of Transportation, 1993; Crancer et al. 1969), and
there is evidence of substitution between the two in response to changes in
the relative price of the two commodities (DiNardo and Lemieux, 1992;
Chaloupka and Laixuthai, 1994).

In addition, the net effect of any particular externality is often difficult
to calculate or even perverse. The classic example is the effect of smoking
on the use of publicly funded health care (Viscusi, 1994). The standard
argument in favor of smoking-reduction policies is that smoking causes
decreased health and increased use of Medicaid, Medicare, or other
subsidized health care. But any action that tends to shorten life means
decreased use of publicly funded Social Security and Medicare, thereby
positively affecting the nation's fiscal balance. In some cases calculations
of this type suggest that the "positive" effects are similar in magnitude to
the negative ones.

Finally, even if drug use does cause externalities, and even if these are
sufficiently great to justify a public policy response, there are policies
other than prohibition that can reduce drug consumption without the negative
effects of prohibition. And the existence of externalities does not imply
that the optimum level of consumption is zero, assuming consumers get
benefits from drug consumption. Rather, the standard externality argument
suggests reducing consumption relative to legalization, but not all the way
to zero.

Irrational Consumption

A different perspective on drug use, independent of externalities, is that
some consumers are not rational; they harm themselves by using or abusing
drugs because they fail to account for the negative consequences. According
to this view, policy-induced reductions in drug consumption benefit such
people by preventing them from harming themselves. It is undeniable that
some people make bad decisions about drugs, although, as with externalities,
the harms from drug consumption are often exaggerated (Miron and Zwiebel,
1995; Miron, 1998).

The mere fact that irrationality exists, however, does not mean attempts to
reduce drug consumption are desirable policy; the benefits of reducing
irrational consumption must be weighed against the costs of any policy used
to achieve that reduction, and they must be balanced against the costs of
reducing rational consumption. Further, as with externalities,
policy-induced reductions in irrational drug consumption might induce
substitution toward goods that have similar or more harmful effects.

Even if attempts to reduce drug consumption are warranted by irrationality,
prohibition is not necessarily the right policy, given the negative effects
of prohibition. Indeed, prohibition might exacerbate the effects of
irrationality to a greater degree than alternative approaches. Prohibition
potentially glamorizes drug use in the eyes of those too young, naive,
foolish, or myopic to consider the long-term consequences. Also, prohibition
alters the reward structure in the illegal drug trade in ways that entice
the myopic into that trade. Under prohibition, the monetary rewards for
working in the trade are high, but this is merely compensation for the
elevated risk of injury, death, and imprisonment. Rational people understand
this and work in this trade only if the total compensation equals that
available in other sectors. Myopic teenagers, on the other hand, likely
focus on the cash and thus expose themselves excessively to substantial risk
of death or prison.

Immoral Consumption

A final perspective on drug consumption and public policy is that drug use
is evil or immoral, and thus policy should discourage drug use to
demonstrate society's disapproval.

Economic analysis does not address the morality argument per se. But unless
one puts infinite weight on taking a moral stand against drugs, the benefits
of making a moral statement must be weighed against the costs of any policy
that makes this statement. Similarly, prohibition is not the only policy
that can send a message about society's disapproval of drug consumption,
which means that the costs of using prohibition to make a moral statement
must be weighed against the costs of using other policies to this end.

The previous analysis also suggests that, from a moral perspective,
prohibition has many undesirable effects. Prohibition causes increased
violence, some of which affects innocent bystanders caught in drive-by
shootings carried out by rival drug gangs or in guerrilla bombings, for
example, in Colombia. Prohibition induced restrictions on clean needles mean
that more children are born HIV-infected. Prohibition means that peasants in
Latin America, including some who do not grow coca, have their crops
destroyed by aerial spraying of pesticides. And prohibition means that
criminals get rich at the expense of society generally.

Summary

The normative analysis of drug prohibition suggests three key conclusions.
First, virtually all the effects of prohibition are undesirable, with the
possible exception of reduced consumption. Second, reduced drug consumption
is not necessarily desirable; in particular, any reduction in rational drug
consumption is a cost, not a benefit, of policies that reduce drug
consumption; the right objective is eliminating externality generating or
irrational drug consumption. Third, even if policy should attempt to reduce
drug consumption, prohibition is not the only possible approach.

IV Alternative Policies

The preceding analysis suggests that prohibition has many undesirable
consequences relative to prohibition, but it does not by itself imply that
legalization is preferable. The choice between these two approaches depends
in part on one's moral stance with respect to drug consumption but more
importantly on evidence about the degree of rational versus irrational
consumption and about the magnitude of various drug-related externalities.

In addition, prohibition and legalization are not the only policies
available by which to address the harms of drug use. In this section I
discuss other possible drug policies and explain how they compare with
prohibition or legalization.

Sin Taxation

A policy that is "between" prohibition and legalization is sin taxation: a
tax on drugs in excess of that on other goods. Sin taxes raise drug prices
relative to those of other goods, thereby discouraging their consumption.
Most economies impose sin taxes on various commodities, including tobacco,
alcohol, and gasoline.

The use of sin taxes to discourage drug consumption faces an important
constraint: the tax must not be so high that it itself generates a black
market because suppliers can profitably evade the tax, even given reasonable
enforcement. Existing evidence confirms that tax rates beyond a certain
point indeed force markets underground; but existing evidence also indicates
that sin taxes can be substantial without so doing. For example, cigarette
taxes in some European countries account for 75 to 85 percent of the price.

Assuming sin taxation does not drive the market underground, it will not
generate the negative effects of prohibition-induced black markets, and it
will decrease consumption of drugs to the extent that demand is responsive
to price. Evidence suggests that demand is indeed responsive, contrary to
earlier characterization of drug use as being price insensitive because of
the addictive properties of some drugs. Whether this responsiveness is large
or small is harder to pin down (see Miron, 1998 for a discussion of the
evidence). Sin taxation also means that the drug trade occurs "aboveground,"
so standard policies such as minimum wage laws, environmental laws, and
product liability laws can still be enforced. Assuming these policies are
beneficial, this represents a plus for sin taxation relative to prohibition.

The standard objection to sin taxation relative to prohibition is the
presumption that prohibition can reduce drug use more effectively than can
sin taxation. This presumption is not necessarily valid, however. The reason
for the presumption is the view that prohibition reduces demand because of
respect for the law or because it establishes a social norm that drug use is
wrong. This is possible, but prohibition might also glamorize drug use in
ways that sin taxation would not, and sin taxation can also send a signal
that society disapproves of drug consumption.

Setting aside the possibility that prohibition reduces demand more
effectively than sin taxation, there is no guarantee that prohibition
reduces consumption more effectively than sin taxation. As shown explicitly
in Miron (200 lb), sin taxation can always raise costs and thus price to
exactly the same degree as prohibition, holding enforcement constant. And
the efficacy of enforcement under sin taxation might exceed that under
prohibition.

Whether sin taxation is superior to legalization depends in part on the
magnitude of externalities relative to irrational consumption. If drug users
impose significant externalities, then sin taxes discourage these
externalities and generate revenue that can mitigate the effects. If drug
users mainly harm themselves, and if their demands are relatively inelastic,
then sin taxes are less appealing since they force drug users to pay higher
prices without reducing consumption, leaving users with less income for
food, shelter, and clothing, and also possibly encouraging crime. In
addition, sin taxation raises political economy issues; political pressures,
rather than economics, might determine which commodities are considered
sinful. Further, there is a danger under sin taxation that the tax may be
raised sufficiently to generate a black market.

Subsidized Treatment

A different policy toward illegal drugs, which can and does coexist with
prohibition or legalization, is government-subsidized drug abuse treatment.
The desired effect of subsidies is to increase the number of people
receiving such treatment, thereby reducing the overall quantity of drug use.

A policy of subsidizing drug treatment raises a number of issues. Although
it is easy to advocate such policies out of compassion for drug abusers, the
question for society is whether the benefits (such as increased earnings for
drug users, lower crime committed by users) exceed the costs. Answering this
question is difficult, mainly because assignment to treatment is not random.
The available evidence does not make a strong case for subsidized treatment
(Apsler and Harding, 1991).

An additional issue is that subsidizing drug treatment, by lowering the
price of such treatment to drug users, might encourage drug use. Further,
even the perception that this could occur-or a feeling by some that it
"rewards" drug use-is a problematic consequence of this policy.

None of these caveats is meant to disparage treatment. The point is that
subsidizing treatment is a separate question from whether treatment is
beneficial, and it is a separate question from whether prohibition is
preferable to legalization. Many critics of prohibition take as given that
reduced expenditures for prohibition should translate into increased
expenditures for subsidized treatment. It might be desirable to legalize
drugs and subsidize treatment, but subsidized treatment has its own costs
and benefits that require independent analysis.

Medicalization

An alternative to prohibition, which might be termed medicalization, is to
put control over drugs in the hands of physicians, with little or no
oversight from law enforcement. Under current United States policy, doctors
can prescribe cocaine, and most opiates, amphetamines, and depressants under
certain conditions. But their ability to prescribe is strictly limited, and
drugs such as heroin, marijuana, and LSD cannot legally be prescribed under
any circumstance. More broadly, even when doctors can legally prescribe
various controlled substances, they avoid doing so because of concern about
legal monitoring of their prescription practices. Under a more liberal,
medical approach, which exists to some degree in Europe, doctors would face
minimal legal restraint on the prescribing of controlled substances. In
particular, they might be allowed to "maintain" addicts, meaning the ability
to prescribe continued supplies of opiates as the "treatment" for addiction.

The critical effect of such a policy change would be to provide many drug
users with a legal source of drugs, thereby reducing the size of the black
market relative to prohibition. If the restraints were minimal, some
physicians would prescribe freely, potentially reducing the black market to
insignificance. Thus, from the perspective of eliminating the negative
effects of a prohibition-induced black market, medicalization is certainly
beneficial. It is not obvious, however, that this approach is better than
simple legalization. Medicalization also implies increased consumption of
drugs, so to the extent there are externalities and irrationality related to
consumption, this is a negative.

Needle Exchanges

A policy that has received significant attention in recent years is needle
exchanges. Under this system, private or government groups provide clean
needles to addicts who might otherwise share dirty needles and thereby
spread HIV and other diseases. These programs exist in substantial part
because of government restrictions on the sale of clean needles, which in
turn reflects prohibition. If drugs were legal there would be far fewer
restrictions on non-prescription needle sales.

This approach differs from those discussed earlier because the main
objective is to reduce the harms of drug use rather than drug use itself,
although many needle exchanges do provide counseling and guidance into drug
treatment. Under prohibition, needle exchanges are an awkward activity for
the government, since this policy appears to accept drug use at the same
time that prohibition seeks to punish drug use. Government could reduce the
controversy surrounding the issue by repealing the prohibitions on the sale
of clean needles; this would allow private groups greater freedom to run
needle exchanges. There is some evidence that these programs reduce the
sharing of needles and little evidence that they encourage drug use (Gostin,
1991).

Public Education Campaigns

Under legalization or prohibition, public health campaigns that provide
information about the consequences of drug use are also an element of drug
policy. More information is generally better, and persuading people not to
use drugs would circumvent most other issues. But this is probably not the
right benchmark for gauging government anti-drug campaigns. In many cases
these exaggerate the dangers of drug use to such a degree that the audience
ignores the message entirely. And available evidence fails to show that
anti-drug campaigns such as DARE significantly reduce drug use (Rosenbaum
and Hanson, 1998).

Summary

The main point of this section is not to endorse or criticize the policies
discussed earlier; as with the choice between prohibition and legalization,
a full evaluation depends partly on personal values and even more on the
evidence, which I have not attempted to evaluate systematically here.
Instead, the objective has been to clarify the effects of different policies
and to show how they relate to prohibition and legalization. The key message
is that each of these policies has its own costs and benefits; each requires
its own evaluation.

V. Conclusions

This paper does not attempt to make the case for or against prohibition or
legalization; likewise, it does not claim to be a complete or systematic
evaluation of the evidence. The goal has been to show how the legal status
of drugs affects the market for drugs and to demonstrate that many outcomes
commonly attributed to drugs are instead due to drug prohibition.

It is worth noting that much of the analysis made no reference to any
specific property of drugs, such as addictiveness. The basic analysis
applies to any commodity for which there is substantial demand and
relatively imperfect substitutes. So the key message is that the legal
treatment of drugs plays a huge role in explaining how drug markets operate,
not the physical or psychopharmacological properties of drugs.

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Jeffrey A. Miron is Professor of Economics at Boston University and
President of Bastiat Institute, Incorporated. He has published more than
twenty-five articles in refereed journals and thirty op-eds in the Boston
Herald, Boston Business Journal, and Boston Globe. His area of expertise is
the economics of libertarianism, with emphasis on the economics of illegal
drugs.