Bastiat’s Bastions

One of the important points made in an introductory economics class concerns a measurement of demand, of buyer behavior, called the “elasticity of demand.”  Elasticity of demand measures how buyers respond to price changes by reducing their purchases.  Here are two possibilities to consider:  1) buyers respond so much to price changes, that when the price of the good increases, total spending on that good goes down;

2)  buyers cut back some when the price goes up, but not by much, so that price increases lead to more spending on the good.

The first case occurs when buyers can easily buy replacement good usually referred to as substitutes.”  An example of this first type of good might be something like chicken thighs, as there are other parts of chicken available, other types of meats and other types of foods, all of which substitute for chicken thighs to some degree.  This type of good is said to have an “elastic” demand.  The second occurs when there are few substitutes for the good under question, such as with an addictive substance, like tobacco or heroin, which are said to have inelastic demands. 

A way that some economics instructors drive home the importance of understanding elasticity of demand is by using the example of heroin and effectiveness of U.S. drug policy.  Heroin, being highly addictive, has a highly inelastic demand.  Higher prices lead users to cut back some, but by such a small amount that overall spending on heroin rises when prices go up.  When the U.S. DEA is able to reduce the supply of heroin into the country, the price of heroin naturally increases.  Since heroin has an inelastic demand, higher prices lead to increased spending on heroin.   Heroin addicts seldom have great jobs and so much of an addict’s source of spending is from money-making criminal activities, from prostitution and pornography production to thefts, ranging from car theft to burglary to mugging. 

What all this means is that higher heroin prices because of more effective interdiction of heroin imports leads to higher rates of money-making crimes even though the amount of heroin flowing into the country is reduced, because the street value of heroin coming in increases.  This suggests that giving heroin away, instead, would cause crime rates to fall. 

Well, that is exactly what happens.  In this article about legalizing heroin in Switzerland, it is noted that crimes by heroin addicts “have dropped 60 percent since the program began in 1994….”  In addition, if the government is supplying safe heroin, so that there is no possibility of running a profitable heroin trade, there will be no wars among rival heroin suppliers.That certainly should give us something to think about.-MC

This entry was posted on Tuesday, December 2nd, 2008 at 4:46 pm and is filed under Crime, Health Care. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.