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December 12, 2012 12:48 PM Why Illegality Makes Drugs More Expensive Than Taxes Ever Could

By Keith Humphreys

One of the central rationales for making certain drugs illegal is to elevate their price and thereby reduce consumption. It’s astoundingly effective: illegality makes lightly processed plant matter (e.g., cocaine) more valuable by weight than gold.

It has long been understood that part of this price inflation occurs because individuals in the drug trade demand higher wages to compensate them for the risk of arrest. In the current issue of National Affairs, Jonathan Caulkins and Michael Lee note that an additional, less commonly appreciated mechanism is also at work:

…inefficiency stems from having to operate covertly. The precautions required to evade detection make the production of drugs very labor intensive. Grocery-store cashiers, for instance, are more than 100 times as productive as retail drug sellers in terms of items sold per labor hour. Similarly, hired hands working for crack dealers can fill about 100 vials per hour, whereas even older-model sugar-packing machines can fill between 500 and 1,000 sugar packets per minute. This labor intensity of drug production, combined with the high wages demanded for that labor, are what drive up the costs of drugs; by comparison, materials and supplies — glassine bags, gram balances, and even guns — are relatively cheap.

Caulkins and Lee provide a useful comparison point to appreciate the impact of illegality on price: If cigarettes suffered the same legal disadvantage as cocaine and heroin, they would cost about $2,000 a pack. This is a stark illustration of how taxes on a legal drug could never even remotely raise prices as high as does illegality. Even cigarettes taxes that attempt to raise the price per pack of cigarettes to one half of one percent of what their price would be under illegality are widely evaded and create huge black markets.

[Cross-posted at The Reality-based Community]

Keith Humphreys is a professor of psychiatry and behavioral medicine at the Stanford University School of Medicine.
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