"War on Drugs” is a set of policies and activities undertaken by the U.S. government to reduce the use and trade of illegal drugs.

The War on Drugs is an area ripe for economic analysis because of its impacts on the demand and supply of drugs and on the marginal benefits and marginal costs of drug use and drug reduction activities.

The War on Drugs has been waged in particular against heroin, cocaine, crack, marijuana, methamphetamine, and pharmaceutical drug abuse. Federal funding for drug control programs is approximately $15.5 billion annually, and roughly 2 million Americans are arrested for drug-related offenses each year.

Statistics on average rates of drug use hide widely variable patterns in terms of the types of drugs used and the demographics of those who use drugs. The most commonly used illicit drug is marijuana, which is used by roughly 76 percent of illicit drug users.

• The rate of drug use tends to be higher among me unemployed than among those with jobs.

• Drug use also tends to be higher among 8- to 25-year-olds than among other age groups.

• The rate of drug use is lower for college graduates than for those with lower levels of education.

Drugs are traded in markets where the interactions between demand and supply determine drug prices and the incidence of drug use.

The downward slope of the demand curve reflects the inverse relationship between the price of the good and the quantity demanded. For example:

• As the price of Huxsoma increases, the quantity of Huxsoma demanded falls for several reasons.

• A rising price makes Huxsoma harder to afford, so the income effect generates a reduction in the quantity of Huxsoma demanded as its price increases.

• The substitution effect implies that as the price of Huxsoma increases, consumers will instead purchase substitute goods that are now relatively cheaper.

• Finally, the law of diminishing marginal utility implies that consumers' willingness pay for Huxsoma falls as the quantity of Huxsoma consumed rises.

Negative externalities are costs that are imposed on third parties.

Positive externalities are benefits that are imposed on third parties.

Private marginal cost are marginal costs that accrue only to the producers of a good or service.

Social marginal cost are marginal costs that accrue to society as a whole.

Taking an example for the unregulated market of Huxsoma, demanders and suppliers of Huxsoma only have incentives to consider the costs they incur (MC(private)) and the benefits they receive (MB).

• Based on this comparison, the optimal level of production and consumption of Huxsoma is Q*(private) and the optimal price is P*(private).

• To determine the socially optimal quantity of Huxsoma, we need 10 compare social marginal costs (MC(social)) against marginal benefits (MB).

• Point Q*(social) illustrates the level of production and consumption where the marginal benefits associated with Huxsoma are equal to its social marginal costs.

• At Q*(social) the marginal benefits attained from Huxsoma are just equal to the marginal social costs incurred to get those benefits.

• At output levels above Q*(social), society incurs higher marginal costs than marginal benefits from Huxsoma.

• At output level Q*(private), for example, the private marginal cost of Huxsoma is P*(private) but the social marginal cost of Huxsoma is MC(social), so the social marginal costs exceed marginal benefits.

• In the presence of negative externalities, an unregulated market produces more than the socially optimal level of Huxsoma.

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A second market failure associated with drugs is imperfect information. In a market plagued by imperfect information, producers or consumers have only limited information about a good or service, and they may not be aware of the full costs and benefits of producing or consuming the good.

Because drugs are bought and sold in markets, policy makers have two basic tools at their disposal to reduce drug use: policies to reduce the demand for drugs or policies to reduce the supply of drugs. U.S. lawmakers have used both demand-side and supply-side policies as part of the War on Drugs.

• Demand side policies:

  • Demand-side policies in the War on Drugs aims to reduce drug use by reducing the demand for drugs.

  • Factors that can shift the demand for a good or service include changes in income, changes in the prices of substitute or complement goods, changes in tastes and preferences, changes in expectations, and changes in the number of consumers in the market.

  • It is unlikely that policymakers could reasonably reduce the demand for drugs by enacting policies to manipulate incomes or the number of consumers in the market Policymakers' ability to alter the prices of substitute and complement goods is also limited.

  • Alcohol producers, however, are unlikely to support such a policy. Instead, demand-side policies have predominately aimed at changing expectations and reducing people's tastes and preferences for drugs.

  • Laws that make it illegal to consume or possess a drug are aimed at the demand side of the market.

  • By targeting consumers rather than suppliers, such laws reduce the demand for illicit drugs.

  • Programs aimed at the prevention and treatment of drug abuse are also demand-side policies.

• Supply side policies:

  • Supply side policies involve interdiction (disrupting the transport of drugs), destroying drug production facilities, eradicating crops, and pressuring governments in other countries to help reduce exports of drugs to the U.S.

  • Supply-side policies generate a costly trade-off in the War on Drugs.

  • On the one hand, the higher price created by the reduction in supply decreases the quantity of drugs traded and used in the current period.

  • On the other hand, higher drug prices mean increased incentives for new drug dealers to enter the market in later periods.

  • Higher prices may also generate increases in drug-related theft and other crimes as users must now find more money than before to fuel their habit.

When demand is relatively elastic, changes in the price of the good generate relatively large changes in the quantity of the good demanded.

When demand is relatively inelastic, changes in price cause relatively small changes ill the quantity of the good demanded.

Knowing the elasticity of demand for drugs is dearly important in understanding the effects of supply-side drug reduction programs. Economics researchers at the U.S. Department of Justice have found that the demand for marijuana and methamphetamine are relatively elastic, while the demand for heroin and cocaine are relatively inelastic.

• These elasticities imply that supply-side programs to reduce the supply of marijuana tend to generate relatively large reductions in quantity and small increases in price.

• Alternatively, programs to reduce the supply of cocaine and heroin generate relatively large increases in price but only small reductions in quantity traded.

• The researchers estimate that if supply-side programs were not in place for drugs like cocaine and heroin, drugs would sell for prices that are comparable to aspirin.

At least 16 states allow for the legal use of marijuana for medical purposes. Arguments against the legalization of marijuana include its potential to be more easily accessible to children and its use as a gateway to more dangerous drugs.

The supply of marijuana would likely also increase with legalization because the risk of fines and imprisonment for producers would fall.

• Production and transportation costs would likely also fall because producing and transporting marijuana on the black market is likely more expensive than producing and transporting it legally.

• One could even imagine better production technology contributing to an increase in supply as researchers find improved crop varieties, better fertilizer, and improved agricultural techniques for growing marijuana.

• Advocates of marijuana legalization also argue that the safety of drugs would improve if they were legalized, since they could be regulated in the same way as other agricultural products.

• All else being equal, the increased supply would decrease marijuana prices.