Audie Anthony Q.

Palpal-latoc
BSA-III
ECO102
OUTPUT
Economic Theory on Illegal Drugs
Our new president is into eliminating drug trade in the Philippines. People from the
Philippines witnessed what he said that he would eliminate drugs within three to six months.
The illegal drug trade in the Philippines remains a serious national concern. Two of the most
used and valuable illegal drugs in the country are methamphetamine hydrochloride (shabu)
and marijuana. Whether you are rich or poor, famous or not and a boy or a girl you will all face
the consequences when you use drugs. Extrajudicial Killings is an issue that the president has
because almost all are against it even the United Nation.
There are three distinctive features of illegal drug market and they are the following:
1. the role of imperfect information: the fact that sellers and buyers are
uncertain about the quality and quantity of drugs in a transaction;
2. epidemics and contagion: the sudden speed with which drug use can
increase and the fact that it spreads through social contact; and
3. the role of enforcement in affecting the price of drugs and the manner in
which they are distributed.
According to Patrick Dixon, There are 10 strategies in the government must do to
prevent drugs in the market but I only chose three concrete actions:
1. Toughen penalties against all those making profits from drug trade
2. Tighten up laws on selling / promoting smoking / tobacco and alcohol
3. Mandatory Drug testing schemes
Supply side of a drug market

The market demand curve D1 slopes downward: at higher prices, users in the aggregate
purchase a lower quantity of the drug in question. The market demand curve reflects two types
of responses to higher prices: some drug users cut back on their consumption, while others may
drop out of the market and become nonusers. Addiction raises the possibility of asymmetry in
that lower prices may increase participation; higher prices may not reduce participation in the
short run.
The market supply curve S1 slopes upward: at higher prices, the supply network is
willing to provide more drugs to the market. The market supply curve again reflects two types of
responses to higher prices: some current suppliers expand the size of their drug-dealing
business, and there may be new entrants who provide new sources of supply.
This shift captures the idea that to compensate for the extra risks and costs created by
the policy intervention, suppliers require a higher price to bring any given quantity of drugs to

the market. How much the supply curve shifts depends on the effectiveness of the enforcement
efforts and suppliers ability to respond to those efforts. Suppose, for example, that police
increase arrests of street-level dealers. How much this raises unit production costs reflects how
much drug-selling organizations have to raise wages to compensate dealers for the additional
risk, on the assumption that the dealers can estimate that rise. It also reflects how effectively
these organizations can shift their production and distribution systems in response to these
enforcement shifts. If sellers can shift sales activities indoors or otherwise avoid the increased
enforcement, the shift from S1 to S2 will be small.
The standard model assumes that the market price adjusts until an equilibrium is
reached at which the quantity demanded equals the quantity supplied. The original equilibrium
in Figure 2-1 is E1: Q1, P1. After the supply-side intervention, a new equilibrium is reached, E2:
Q2, P2. This new equilibrium reflects an interaction of both supply and demand factors. The
relative slopes of these curves determine the extent that increased production costs are borne
by consumers in the form of higher prices. The supply-and-demand model yields the
fundamental insight that a supply-side intervention on the model of the war on drugs
The Price elasticity of drugs on supply is generally positive and therefore it is elastic.
The effects of a supply side enforcement if the price is high then there would be a shift to
the left and if the production cost per unit increases then the real output also decreases and the
supply shifts to the left. The government should give regulation because it is a non-price
determinant and if more regulation is against drug and the scare of extra judicial killing then it
will decrease the supply too.
A supply-side interventionsuch as increased border interdiction or more intensive
police actions against street dealerscauses the market supply curve to shift up, or
alternatively to the left, to curve S2. The vertical distance between S1 and S2 may be
interpreted as the increase in unit production and distribution costs induced by supply-side
interventions.
The Government is on the supply side and it is costly on their part. The supply impact is
not that effective because if there is a decrease in suppliers then price increases and therefore,
there would be more people interested on investing on drugs due to higher profit.
Demand side (Demand of people)

In this situation, elasticity denotes the percentage change in the quantity of drug
demanded given a 1 percent increase in the price. In similar fashion, the price elasticity of
supply denotes the percentage change in the quantity of drug supplied given a 1 percent
increase in the price.1

One might assume, based on the commonsense notion of addiction, that drug demand
is relatively inelastic or unresponsive to prices. However, as we discuss in more detail below,
the price elasticity of demand varies across drugs (heroin, cocaine, marijuana), types of users
(heavy, occasional).
In fact, demand for heavily addictive substances is consistent with a wide range of price
elasticities. Suppose, for example, that an individual spends every cent of her monthly income
on crack cocaine. If crack cocaine prices rise by 1 percent with no accompanying change in her
economic circumstances, she will spend the same amount and thus purchase 1 percent less
crack than she did before. This implies a price elasticity of demand of 1. Luksetich and White
(1983) suggest, based on early ethnographic work, that heroin addicts may have a fixed budget
for all items other than heroin, representing the minimum that is needed for shelter, food, and
clothes; if so, there would be unitary price elasticity. In contrast, more affluent users of
marijuana, for whom the drug accounts for a small share of their total incomes, may change
their total consumption very little in response to price increases.
A second insight is that many market factors other than price can cause drug demand to
shift. The analytical emphasis of the supply-and-demand model is on prices and quantities, but
this analytical emphasis does not mean that price is the most important empirical demand
influence. The demand curve shows the relationship between quantity demanded and price if all
other influences are constant. When one or more of these other influences change, the entire
demand curve shifts: at each given price, the quantity of the drug demanded has shifted.
Demand shifts can also obscure the impact of supply-side interventions. Intervention
was launched about the same time as a nonprice influence shifted the demand curve out (up
and to the right). An example of such a demand influence is an increase in the population cohort
size of adolescents and young adults. At the new equilibrium, the quantity of drug use has not
changed much because of the offsetting effects of the supply-side intervention and the demand
shift. However, the supply-side intervention succeeded in preventing drug use from increasing to
Q3, which would have been the result if the demand had shifted in the absence of the
intervention. In this case, the price increase from P1 to P3 is a valid indicator of the success of
the supply-side intervention, even though success is not apparent in changes in the quantity
used.
The Price elasticity of drugs on demand is generally negative then it is inelastic.
The effect of Potential demand shifters include demand-side public policies, such as
antidrug media campaigns or treatment programs; law enforcement measures that target users;
demographic factors; changing attitudes toward intoxication and self-control; and economic
factors, such as income and employment opportunities. Under the conventional view that drug
demand is relatively price inelastic, changes in these other influences are likely to be important
explanations for observed variation in drug markets over time and across geographic units,
particularly since some of them, especially tastes, can change rapidly. Demand-side policies
seek to shift the demand curve down (left). All else being equal, such policies shift the
equilibrium down the supply curve, resulting in a lower equilibrium price and a lower quantity of
drugs consumed. If social harms associated with illegal drug use are positively related to the
dollars spent on these substances (since these are criminal incomes), demand-side
interventions are especially attractive because they induce favorable price and quantity effects,
while supply-side interventions generate only favorable quantity effects. I can say that they are
aware about dying when using illegal drugs then it decreases demand.
The demand impact is effective unlike in the supply side if the demand is low then the
suppliers will have no customer to give drugs and they would shift to other industry. If there is no
demand then there will be no supply. The lesser profit or loss on part of the supplier will make
him stop the business. The use of Anti-Drug Campaigns, Testimonies of convicted drug addicts
and increase in the rehabilitation centers will make the demand shift to the left or it will decrease
demand.
Illegal Drugs are dangerous substance that the government are trying to end specially
our President who is very vocal about drugs and is even into killing them. Our President should

shift from being on the supply side and focus on the demand side or demand of people because
the supply side is costly on the part of the government while in the demand it is effective in
eliminating interest of drug users then it eliminates drug dealers because of low sales and they
will find other businesses. The Anti-drug campaign, awareness of the possible effects by the
testimonies of drug user and increase in rehabilitation centers will surely help decrease the
demand of drugs. This illegal drug is part of the underground economy that gives statistical
discrepancy when computing our Gross Domestic Product.
References:
https://www.nap.edu/read/12976/chapter/4#19
https://en.wikipedia.org/wiki/Illegal_drug_trade_in_the_Philippines
http://www.globalchange.com/truth-about-drugs-chapter-11.htm