Wednesday, March 4, 2009

Drugs and Crime

Assume that the price elasticity of demand for marijuana is -1.20 and the price elasticity of demand for cocaine is -0.40. Assume further that marijuana and cocaine users get the funds to pay for their habit by resorting to petty larceny. Suppose the government increases enforcement against drug suppliers such that the prices of both illegal goods rise by 20%. What will happen to the price of each drug? What will happen to the amount of petty larceny committed by marijuana and cocaine users? Explain precisely.

1 comment:

Sisi said...

Both prices will increase due to the supplier side price raise. However, like the effect of tax, both sellers and buyers share the burden, the increase is less than 20 percent.
Since the elasticity of marijuana is greater than that of cocaine, the demand of marijuana drops more significantly than cocaine.
Petty larceny will increase too. And the increase is in large part due to cocaine. Cocaine is less elastic, indicating that people are more addicted to that and no matter what the price is, they need it anyway. Thus, when the price raise, the only way to get enough quantity by limited money is to commit larceny.