9. Drugs, Alcohol and Crime

9. Drugs, Alcohol and Crime C. Fellows, G. Flanagan, S. Shedd, Changing the Legal Status of Goods, (coursepack) S. D. Levitt and S. Dubner, Why Do Drug Dealers Still Live with Their Moms?, (coursepack) J. Miron and J. Zwiebel, "The Economic Case Against Drug Prohibition,'' (coursepack) 1

What s in the Notes Only? Details of the Controlled Drugs and Substances Act types of drugs, and legal restrictions. Who are the users and their sentences. Details of health costs of drug use, CJ costs, etc. 2

A) Introduction Key distinctions: Addictive vs. Recreational vs. Dangerous (legal or illegal) drugs. Illegality depends on the Schedule the drug falls into: Production vs. Possession vs. Importing/Exporting vs. Trafficking. 3

350 Arrests by Drug Types 300 250 200 150 + 87% 100 50 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Total Rate Heroin Cocaine Other Drugs Cannabis Source: Beyond 2020 tables

350 Arrests by Charge Types 300 250 200 150 + 74% 100 50 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Possession Trafficking Import./Prod. Total Rate Source: Beyond 2020 tables

What is the Size of the Drug Market? World market estimates: $150 billion? $500 billion (UN)? U.S. market: $60 to $100 $300 billion? Canada: $18 billion (Auditor-General)? At least double Forbes magazine. Thoumi/Naylor: these estimates are ridiculous! Difficulties: double-counting, hidden expenditures, intermediate steps. 6

B) Economic Costs Cost Negative external costs (moral outrage) Net productivity losses Opp. cost of resources used Lost tax and other revenues Increased secondary crimes: Property, violent, corruption, money laundering, tax evasion Policing, courts, corrections Effects on users families Health care costs Fall or rise if legalization? Rise if drug use rises Rise if drug use rises Rise, but now part of GDP? Fall Fall? Fall Rise Fall if addicts get better care, rise if use rises a fair amount 7

C) Drugs and (Violent) Crime Does the use of illegal drugs lead to violence? OR Does the prohibition of drugs lead to consumers/producers committing more (violent) crime? 8

Drugs and Violent Crime in Canada Alcohol-dependent inmates violent crimes. Drug-dependent inmates property crimes. Violence from the illegal drug market: 11% of homicides between 1992 and 2002? Principal reason: settling of drug related accounts. 9

Drugs, Alcohol and the U.S. Homicide Rate Prohibition The End of Prohibition The Start of The Drug War Source: Friedman (based on Miron)

Drugs, Alcohol and Canadian Homicides 3.5 Similar to U.S. Different from U.S. 3.0 2.5 Homicide Rate 2.0 1.5 1.0 0.5 0.0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: StatsCan Historical Data + Justice Stats 11

Possible Routes From Drugs to Violence 1. Pharmacological drugs make you violent. 2. Economic-related to finance purchase of illegal drugs, users turn to (violent) crimes. 3. Systemic created by the entire illegal apparatus of the drug market. 12

Economic-Related: Financing Drug Use High price, no job financing drugs requires theft and violence. Addicts vs. Dabblers. 13

Elasticity of Demand and Drug Purchases $ 0 = P 0 x Q 0. Price D INELASTIC D ELASTIC P 1 P 0 $ 0 Q 2 Q 1 Q 0 Q 14

Dabblers Dabblers many exit market. P 1 x Q 2 = $ D < $ 0. Price D INELASTIC D ELASTIC P 1 P 0 $ D Q 2 Q 1 Q 0 Q 15

Addicts As P Small in Q to Q 1. P 1 x Q 1 = $ A > $ 0. Price D INELASTIC D ELASTIC P 1 P 0 $ A Q 2 Q 1 Q 0 Q 16

How can addicts come up with the needed $? Entorf and Winker s conclusion: the major source of crimes committed by drug-users is their need to finance their consumption. 17

How Prohibition Creates Systemic Violence Miron and Zweibel: Benefits of using violence is high. Lack of legal contract enforcement. Defence against robbery and turf wars. Useful to try and increase market share. Defence against the police! The cost of using violence is low. Already hiring protection, evading the law. 18

Targeting Violence Friedman, Grogger and Willis: prohibition creates the violence. Friedman: if violence is your real policy problem, then target that. 19

Addictions Awareness Quiz 1. B 2. B 3. C 4. A 5. B 6. A 7. C 8. C 9. C 10. C 11. A 12. D 13. A 14. C 15. D 20

D) The Market for Drugs Crucial: which drugs are we looking at? Crystal meth or heroin addictive. Cocaine sometimes addictive? Marijuana much less clear. 21

Demand Dabblers or casual users versus addicts different response to price. What shifts demand? Expected punishment? Psychic costs and benefits? Role of societal norms. Tolerance to the drug over time? 22

Supply In marijuana markets lots of small producers. Cocaine, crystal meth organized crime? A few large firms oligopoly. One firm monopoly. Some evidence of geographic monopolies. Oligopoly/monopoly use market power to set higher prices. 23

Market Structure Producer (farmer) processor (manufacturer) importer wholesaler/distributor retailer (street gang) sales staff (pusher) customer. Organized Crime? 24

Supply cont d in price in quantity supplied. Price S P 1 P 0 Q 0 Q 1 Quantity 25

Supply cont d. What shifts supply? expected punishment S curve shifts left? costs of production S curve shifts right? 26

Drug Market Equilibrium and Prohibition Prohibition: Q to Q NO? Price S 1 S 0 P 0 D 0 Q NO Q 0 27

Incentives and Price Effects Shortage: Price profit opportunity Q supplied Price P 1 S 1 S 0 P 0 D 0 Q NO Q 1 Q 0 28

Dabblers and Addicts P D DABBLERS P D ADDICTS P 1 P 0 Q 1 Q 0 Q 0 = Q 1 Addicts: ΔQ = 0 must pay lots more crime up? Dabblers: Q as they exit to other markets. 29

E) Case Study: Inside a Drug Gang 4 years of data on: Costs, revenues, profits, wages (= distributed profits), deaths, injuries, arrests. Small geographic area, very poor neighbourhood. Until 1980s, social gang. Crack cocaine new profit opportunities small sales require lots of sellers. 30

Central Gang Leadership (Multi-state, 4-6 people) Local Leader (100 in total) Local Leader Local Leader Enforcer Treasurer Runner (between supplier and the gang) Foot-soldiers (Street sellers 25-75 in total) Source: Levitt/Venkatesh Rank and File (Some drugs to sell elsewhere, pay protection)

Central Gang Leadership (Multi-state) Tribute of $7000/month Local Leader Local Leader Local Leader $4-11,000/month Enforcer Treasurer Runner Foot-soldiers (Street sellers) Source: Levitt/Venkatesh $1,000/month $140-470/month for 20 hours/week Rank and File

Drug-Gang cont d Income low < minimum wage. Other compensations? Most still lived at home, often had secondary jobs. Gang expenses: Buying drugs, hiring enforcers, weapons, funerals. 7% are killed each year! 33

Drug-Gang Economics 1. Normal cost structure fixed and variable costs. 2. Franchise behaviour. 3. Rank-order tournament wage/promotion structure. 4. Gang wars, with optimal pricing behaviour. 5. Rise in average wages as chance of death rises compensating differentials! 6. Value of a life is low $25,000 - $110,000. 34

Question: What is the policy conclusion? Given this case study + Fred Burch on prisons. 35

F) Case Study: Grow Operations Details only in the online notes. Easton s conclusions: it is so profitable, impossible to stop it. Except by legalization 36

G) Current Policy: Evaluating the Drug War The drug war (prohibition) works by: production/importation Supply. punishments Demand and Supply. 37

G) Current Policy: Evaluating the Drug War The drug war (prohibition) works by: production/importation. punishments. Q 38

How Supply Restrictions Work Financing destruction of crops. Bribing farmers not to produce. Invading Panama. Interdicting the borders. 39

Why Focus on Supply? Naylor: it is consensual trade, why pick on suppliers? For the Colombian/Bolivian/Afghan farmers, what else could they plant that pays as much? Afghan poppy farmers earn $2,520 per year versus $670 for non-poppy farmers. Opium-poppy production = 1/3 of Afghan economy currently. Afghan opium production 12% 75% of world output since invasion. 40

Why Focus on Supply cont d Americans: choke-point at border makes this efficient? Cooter and Ulen: interdiction is in reality futile and ineffective. Need to look at shifting demand medical treatment for addicts, education? 41

The Benefits of Prohibition Reduces drug use: 1. Reduction in moral concerns of those opposed. 2. Reduction in health costs and early deaths of users and their families. 3. Reduction in lost productivity of users due to health problems, early death, absences. 4. Reduction in (violent) crimes committed by users due to pharmacological effects. 42

Canadian Centre for Substance Abuse, 2002 Illegal Drugs Tobacco Alcohol Health Costs $1.1 billion $4.3 billion $3.3 billion CJ System Costs $2.3 billion $0 $3.1 billion Other Direct Costs - prevention, fire, traffic accidents, etc. $0.095 billion $0.167 billion $1.05 billion Indirect (Prod y) Costs - disability costs, premature death $4.7 billion $12.5 billion $7.1 billion TOTAL SOCIAL COSTS $8.2 billion $17.0 billion $14.6 billion 43

The Costs of Prohibition 1. Enforcement costs. 2. Secondary crimes (crystal meth & property crime.) 3. Health problems due to secrecy: overdoses, accidental poisoning, HIV. 4. Forces dabblers into drinking. 5. Can t use marijuana medically. 6. Creates higher profits for organized crime allows them to expand into other areas. 7. Lost tax revenues. 44

A Cost-Benefit Comparison Thornton: unintended consequences (violence and corruption) are too high. Cairncross: drug prohibition costs the U.S. $35-40 billion in tax dollars, but has not met its own goals. 25% of American 12 th -graders used marijuana in the last month. 1/3 of all Americans over 12 have tried drugs. 45

Koziemko and Levitt on Drug Imprisonment 1. Drug war: P Coke by 5-15%, Q 5-15%. 2. Higher incarceration for drugs a little less drug crime. 3. Higher incarceration for drugs crowded out incarceration for other crimes net result: crime by 1-3%. Given small impact and large costs of drug war, it likely fails the cost-benefit test unless negative external costs of drugs very high. 46

Conclusions on the Drug War The costs are MUCH more than the benefits. Alternative: Harm reduction for addictive/dangerous drugs. Legalization for recreational drugs such as marijuana. 47

H) Harm Reduction through Treatment Programs Addictive drugs medical treatment, education. Price P 0 S P 1 D 1 D 0 Q 1 Q 0 Q 48

Drug Treatment Courts Vancouver/Regina/Toronto treat drugs like alcohol or cigarettes, and divert users to treatment programs. New York: Those in the treatment programs have a 29% lower re-offence rate than those sent to prison It is much cheaper! Jackson: what is the cheapest way to reduce cocaine use by 1% -- more spending on drug war (S left), or more on treatment programs (D left)? Even if treatment success only 13%, it is more costeffective than drug war. 49

I) Decriminalization and Legalization What can we learn from alcohol prohibition: We cannot stop people from consuming what they want to consume. Trying to do so makes things worse, via the creation of violence and other secondary crimes? 50

Market Impact of Legalization Legalization: treat it like alcohol. Regulated and taxed. P P 0 S 0 S 1 P 1 D 1 D 0 Q 0 Q 1 51

B) Decriminalization Possession is a lowlevel summary offence. Production and distribution is an indictable offense. P P 1 P 0 S 0 D 1 D 0 Q 0 Q 1 52

Is Decriminalization Worse than Legalization? Easton: higher prices mean criminals make more profits! Miron/Zweibel: violence is still present, maybe worse? RCMP: users will contest tickets, clog up courts, and raise enforcement costs. 53

Benefits of Legalization 1. Consumer sovereignty let people decide what they should do. UNLESS the external costs are very high? Alcohol and tobacco versus marijuana? 2. Reduced policing/correction costs. 3. Less individuals with criminal records. 4. Less crime, less violence? 54

5. Entry of Legitimate Businesses Economies of scale dramatically lower prices Easton estimates $1 - $3 vs. current $10/joint. 55

Benefits cont d 6. Less health problems Zurich s experience. 7. Less $ for criminals. 8. More tax $ for governments. Easton: $1 $6 billion per year? 9. Divert some tax $ to educating and helping addicts. Thornton quotes many studies showing this leads to a huge net fall in crime. 10. alcohol abuse. 56

Costs of Decriminalization/Legalization 1. More users more external costs? Key: will we get more addicts, or just more dabblers switching between drugs and alcohol? 2. More users more health problems? 3. More users more lost productivity problems? 4. Is marijuana a gateway drug to hard core drugs? Senate report: Cannabis itself is not a cause of other drug use. 5. Will there be problems with the Americans? More production, more shipments to the U.S.? Tightening of border crossings? Drug tourism problems? 57

Conclusions on Legalization Milton Friedman: Legalizing drugs would simultaneously reduce the amount of crime and raise the quality of law enforcement. Can you conceive of any other measure that would accomplish so much to promote law and order? Gary Becker: Legalizing drugs is far from a panacea for all the distress caused by drugs, but it will eliminate most of the profit and corruption from the drug trade. Ending Prohibition almost immediately cleaned up the liquor industry. The revenue collected from large taxes on drugs could be used to treat addicts and educate youngsters about the harmful effects of many drugs. 58

Conclusions on Legalization Your conclusion depends on: Will legalization encourage use of more hard drugs, and will these have negative effects? Are consumers able to decide what is best for them? Are the problems (violence) largely due to the fact the drugs are prohibited? 59