Bryan Caplan  

FP2P Quip of the Day

Hmmm... The Intellectual Propertarian/...
From Arnold and Nick: "In many poorly governed countries, ordinary businesses are as tenuous as drug-dealing in the United States."

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CATEGORIES: Regulation
Twitter: Bryan Caplan @bryan_caplan

COMMENTS (5 to date)
Stephen Smith writes:

To the extent that you can quantify something so abstract, I don't think this is defensible. The most objective way to measure the risk premium is the rate of return demanded by entrepreneuers. Retail drug dealers never settle for less than 40% profit margins, and a more realistic average would be about 75%. And we're not talking annual rate of return - we're talking every time the dealer "reups," which is generally once every few weeks. At an annualized rate, the profit margins are astronomical, even when taking into account business expenses like free drugs to all your various hangers-on and a healthy habit yourself.

chipotle writes:

Stephen Smith, do you have a source for your statistic of 40% - 75% ROI every time a retailer clears his supply and restocks his inventory?

Eric Johnson writes:

I'm failing to understand. Supposing revenue is 150% of expenses on every re-up. Shouldnt revenue then be 150% of expenses for the year, too?

Stephen Smith writes:

@chipotle: Personal experience. Five pounds of high-grade marijuana (known on the street as "headies") is purchased on the East Coast from California and shipped via FedEx overnight. The purchase price is $20,000 for five pounds, which comes out to $250 for an ounce. Ounces retail for $400 on the East Coast, which is a 60% profit. Smaller dealers will purchase this ounce at $400, and then resell by the gram at $20/gram, for 40% profit margins. To use another example, an ounce of powdered MDMA (i.e., ecstasy – the powder form known on the street as "molly") goes for about $1,500 on the East Coast. Grams retail for $100, and individual hits (that is, 100 mg) retail for anywhere from $15 to $20. That makes about 100% profit for each gram sold. Dealers buying in ounces don't often sell that many individual hits – those are usually sold by people who are buying grams at or around $100 each, which makes a profit margin of 50-100%. You'll have to excuse me for not providing my sources.

@Eric Johnson: Ah, the magic of compound interest! If I start with a $500 investment and make 50% profit once, that turns into $750. I then reinvest that two weeks later and then have $1125. Do this over and over, and the annualized rate of return if you're making 50% every three weeks for 40 weeks (assuming a few weeks that you're not able to get your proudct) is over 20,000%.

Douglass Holmes writes:

Stephen S.
Thanks so much for validating my decision to never purchase illegal drugs. Who can afford to spend $400 for an ounce of marijuana?
I don't doubt the profit levels. Our jails are full of drug dealers. Profits have to reflect the level of risks involved, and the risk of jail is very real for the seller. And even if they don't go to jail, they can have their assets seized and then must go to court and prove that the assets weren't related to drug dealing.
So, back to the original issue, are 'ordinary businesses' in some countries really as tenuous as drug-dealing in the United States? You are right to view such claims with skepticism. Still, the point is a valid one. Some people view any profit as evil. And such people do elect guys like Hugo Chavez.

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