The economics of the drug war : effective federal policy or missed opportunity?
McGuire, Marvin H.
Carroll, Steven M.
Henderson, David R.
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We calculated the value of two distinct economic inefficiencies that result from the prohibition of drugs. We define and illustrate these inefficiencies as the two direct components of the deadweight loss created by prohibition. The first is under-consumption and the second component, unique to our analysis, is the payment for risk. Using the 1999 illegal quantities and prices, the derived legal prices, and the estimated demand elasticities for four illegal drugs, we calculated the estimated quantity demanded for these drugs in legal markets. We then used the results of these calculations and estimated the total deadweight loss of the drug war in 1999 to be over $90 billion-$65 billion in payment for risk and $24 billion in under-consumption. We then focus our analysis on the indirect components of the deadweight loss, e.g., costs to reduce supply, cost of incarceration, and productivity losses, etc. Our conservative estimate for indirect deadweight loss for 1999 was $96.1 billion. In the final chapter, we estimate that of the total deadweight loss, America could gain $6.7 billion annually in taxes from legal drug sales, save over $34 billion annually in drug war costs, and recoup the remainder via reductions in prohibition-related phenomena.
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