Question

4. Of what significance is the elasticity of demand for drugs in the debate about legalization of presently illegal substances?

Answer 1

The authors demonstrate how the elasticity of demand is crucial to understanding the effects of punishment on suppliers. Enforcement raises costs for suppliers, who must respond to the risk of imprisonment and other punishments. This cost is passed on to the consumer, which induces lower consumption when demand is relatively elastic. However, in the case of illegal goods like drugs -- where demand seems inelastic -- higher prices lead not to less use, but to an increase in total spending.

In the case of drugs, then, the authors argue that excise taxes and persuasive techniques -- such as advertising -- are far more effective uses of enforcement expenditures.