The Demand for Illicit Drugs

I. INTRODUCTION Illicit drug use and alcohol abuse imposes significant costs on society and on the individual users. These costs include increased crime, health problems, and employment problems. Because of these considerable costs, government, at all levels, has made drug control and the control of alcohol abuse important priorities. The federal government has undertaken an aggressive program of interdiction of drug shipments and eradication of drug crops in the field. The federal government and the state governments have also increased their criminal justice efforts. In analyzing the effect of government drug control programs, economists have applied the conventional supply and demand model to illicit drug markets. The model includes a demand function that is downward sloping with respect to price and a supply function that is upward sloping or horizontal with respect to price. Drug programs like interdiction and drug sanctions are assumed to reduce supply and raise equilibrium price. Other policy options such as some form of drug legalization could increase supply and reduce equilibrium price. The effect of these policies on equilibrium quantity is dependent on the elasticity of demand and on whether demand shifts. Since not much is known about drug price elasticities, the potential effects of various drug control policies remain a speculative exercise. The purpose of this paper is to estimate the effects of alcohol and drug prices on alcohol use and drug participation. Both own price and cross price effects are estimated. There are few prior empirical studies of the effect of drug prices, because data have been difficult to acquire. This paper makes use of newly available data on drug prices and is the first paper to link these data to a nationally representative drug use data set of 49,802 individuals. Estimates of drug price elasticities are important empirical evidence that drug sales can be characterized by market forces. Drug price elasticities are also important in estimating the likely impact of policies that affect drug prices and in estimating the effects of drug prohibition. Cross price elasticities are important to estimate, since they suggest the likely effects of policies such as an increase in alcohol taxes on illicit drug participation and the effects of marijuana decriminalization on alcohol, cocaine, and heroin use. II. PRIOR STUDIES While there are a number of prior studies of the effects of alcohol prices and policies, there are few prior studies of drug prices and polices. The reason for so few prior drug studies is the limited amount of data on drug prices and the limited options for linking these data to an individual record by residential area. This study uses a new data set of cocaine and heroin prices from the Drug Enforcement Agency that was linked to individual records by the Office of Applied Studies at the Substance Abuse and Mental Health Services Administration. Leung and Phelps (1993) provide a review of a number of recent alcohol demand studies. The empirical literature provides considerable evidence that shows increasing the price of alcoholic beverages to decrease alcohol use. Alcohol demand studies generally estimate price elasticities for beer, wine, and spirits separately. Most studies employ aggregate data, but a few use individual data. Studies using aggregate data find price elasticities for beer from about -.2 to about -1.0, for wine from about -.3 to about -1.8, and for spirits from about -.3 to about -1.8. Studies using individual data estimate price elasticities for beer from about -.5 to about -3.0, for wine at about -.5, and for spirits from about -.5 to about -4.0. The few prior studies of the effect of decriminalization on marijuana use generally find that marijuana decriminalization has no effect on participation. Pacula (1994), Thies and Register (1993), Dinardo and Lemieux (1992), and Johnston, O'Malley, and Bachman (1981) all used samples of young people and found no effect of marijuana decriminalization. …