Saturday, 4 March 2017

A structural model of the retail market for illicit drugs

An interesting new paper on A Structural Model of the Retail Market for Illicit Drugs by Manolis Galenianos and Alessandro Gavazza, has appeared in the American Economic Review, March 2017, Vol. 107, No. 3: Pages 858-896.

The abstract reads,
We estimate a model of illicit drugs markets using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs' quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that if drugs were legalized, in which case purity could be regulated and hence observable, the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent. Moreover, increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers' relative profitability of targeting loyal buyers versus first-time buyers.
So one advantage of legalising drugs would be an increase in the quality of drugs sold and a reduction if the range of quality in the market with low quality drugs being driven from the market due to more information on quality being available before  purchase. This has a obvious advantage when you consider the effects of low quality drugs on users.

But like with most repugnant markets people - and politicians - will react on emotion rather than evidence and so the war on drugs will continue to be fought and lost.

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