Question

16. Some policy makers have claimed that the U.S. government should purchase illegal drugs, such as cocaine, to in crease the price that drug users will face and therefore reduce their consumption. Does this idea have any merit? Illus- trate this logic in a simple supply and demand framework. How does the elasticity of demand for illegal drugs relate to the ethieary of s olikyAre you more or less willing to lavor this policy if you are istic?

Answer 1

In the figure below, this will be seen as having a price floor at P1 in the market for illegal drugs. This will discourage consumption because price is too high. Government should by the excess drugs supplied that result from the price floor. Hence, buying surplus illegal drugs by the government would reduce the consumption to Q1

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This depends on the elasticity of demand. When demand is relatively inelastic, reduction in consumption due to a price floor is relatively lower and this undermines the efficacy of this policy. We would be less willing to favor this policy when demand is inelastic because effect on consumption is not much