David R. Henderson  

The Big Victims of Drug Prohibition

Carillion and the reputation o... A tax by any other name . . . ...

Never forget consumer surplus.

Steven Landsburg is critical of co-blogger Scott Sumner's proposal to give preference in licensing legal marijuana sellers to those who were previously convicted of marijuana offenses. Scott calls this "affirmative action for drug pushers." Actually, though, his quote about the policy he favors does not mention drug dealers. (The word "pushers" is a misnomer; almost no one who sells drugs "pushes" them.)

Here's the relevant passage that Scott quoted:

In Los Angeles, residents with past marijuana convictions will not only be allowed to buy licences to sell the drug, but will be given priority. Under the city's "social-equity programme", low-income Angelenos who have previous marijuana convictions or who have lived in areas with disproportionately high rates of arrest for marijuana offences will be given preference when licences to open marijuana retail businesses are granted. Oakland, San Francisco and Sacramento have introduced similar initiatives.

We can be sure that many of these convictions, possibly most, were for dealing or producing illegal marijuana. But I would bet that some of them were for simply using marijuana. And even some of the convictions for dealing might have been against users who were heavy users. The police and prosecutors tend to regard being caught with large amounts of marijuana as prima facie evidence that one is a dealer; sometimes, though, some of these people might simply have been stocking up.

All this is relevant for understanding where I'm going to go in responding to Steve. Here's Steve's criticism:

First, if you want to compensate people for past persecution, the right way to do it is with cash, not by misallocating productive resources. If there must be licenses, they should be allocated to those who can use them most efficiently, regardless of any past history.

Second, drug dealers have never been the primary victims of anti-drug laws. They can't be, because there is free entry and exit from that industry. Anti-drug enforcement leads to exit, which in turn leads to higher profits for those who remain -- and the exit continues until the profits are high enough to compensate for the risks. One way to think about this: All those "persecuted" drug dealers were, in effect, employing the government to stifle their competition, and paying a fair price for that privilege in the form of occasionally being convicted and punished themselves.

That's an excellent critique.

Here's where Steve goes off-track though. He continues:

The primary victims of anti-drug legislation are potential consumers who were deterred by artificially high prices. How do you compensate those victims? You can't. In a population of 1000 people who have never used drugs, it's quite impossible to identify the 200 or 300 or 400 who would have happily indulged if only the price had been lower.

No. No. No. Steve has put in finger on the category that contains the primary victims but has totally missed the primary victims within that category. The primary victims are consumers. But they are not potential consumers; they are actual consumers.

Think about a downward-sloping demand curve. Where are the potential consumers "who were deterred by artificially high prices?" They are further down the demand curve than the actual consumers who were not deterred. The loss in consumer surplus to the actual consumers is much higher than the loss in consumer surplus to those who were deterred.

And the loss is even greater to those actual consumers who were caught and fined or imprisoned. That's where my earlier point comes in. Some of those people who Scott wants to give preference in licenses were consumers and so Steve's second argument doesn't apply to them. Overall, though, they are likely to be a small percent of those who were convicted, so Steve's second argument applies to most of the people who, with Scott's proposal, would get preference.

Bottom line: I agree broadly with Steve's argument against Scott's proposal but Steve has badly missed identifying "the biggest losers."

Comments and Sharing

COMMENTS (13 to date)
Philo writes:

You write: "The loss in consumer surplus to the actual consumers is much higher than the loss in consumer surplus to those who were deterred." This may be true per person, but probably many more people were deterred than actually consumed drugs in spite of anti-drug enforcement. So Steve may be correctly locating the bulk of the lost consumer surplus.

Scott Sumner writes:

Steve makes an interesting point, but I don't think it's as applicable to the real world as he assumes.

1. Drug users are the main victims of these laws.

2. AFAIK, the vast majority of people who go to prison for drug violations are drug users who are convicted of selling drugs. In part, they are being punished for having a preference for consuming drugs.

So I'd stand by my argument.

Would it be better to abolish all licensing laws and compensate people with cash? Yes, of course.

David R Henderson writes:

This may be true per person, but probably many more people were deterred than actually consumed drugs in spite of anti-drug enforcement. So Steve may be correctly locating the bulk of the lost consumer surplus.
Really good point.
Of course, if the demand for marijuana is highly inelastic, as many people claim (I don’t know if it’s true), then your point becomes weaker.

James Pass writes:

I agree with Steve's point about allocating licenses to those who can use them most efficiently and I agree with Mr. Henderson about where Steve goes "off track."

As for what to do for people with criminal records for activities that are no longer illegal, there's no simple answer. Off the top of my head, I suppose distinctions should be made between users and dealers. Under most circumstances, perhaps the criminal records for users should be expunged. But what about someone convicted of selling marijuana to minors?

As for loss of consumer surplus, how much should society and government focus on finding and compensating ALL the victims of bad policies? How about the millions of victims of institutional racism? How about women and homosexuals who were the victims of bad policies? How about policies that make victims of us all, such as overpriced goods and services (including medical services) due to bad policies? So if we're going to compensate all victims for loss of consumer surplus, the people who didn't buy marijuana because it was illegal or too expensive will have to get in a very long line.

Bob Murphy writes:

Good points all around...

Another thing that's odd: I'm not sure exactly how to analyze the preference being given to the former drug convicts, but depending on the specifics, the proposal is even worse than Landsburg thinks.

If the government is auctioning off a set number of licenses to the highest bidders, *except* that they give a margin of preference to former drug convicts, then it's the taxpayers who pay for the compensation.

However, if the licenses have a set price and it's just a matter of the government selecting which people will get them, then ironically the people in society who "pay for" the compensation are current drug consumers. I.e. they have to deal with drug sellers who are less efficient than potential rivals who were excluded from the license.

For an analogy, suppose the government took all the existing pot smokers, and made them each kick in $1. Then they randomly picked a former drug convict to win the pot of money. Would that be a sensible way to compensate for the past abuses of the Drug War?

Mark writes:

Scott wrote in his last post that in some sense a fine and a tax are equivalent. I agree, and I think this introduces a serious constitutional problem with 'sin taxes', as they are really fines and, to go even further, a fine is in essence a partial prohibition (a million % tax on alcohol is effectively prohibition of alcohol).

How this relates here: it seriously undermines the case for reparations. In this case, any preferential treat of prior drug offenders ends up being a tax on either everyone else, or on drug consumers, or on other drug sellers. Somehow, someone ends up being fined for something they didn't actually do, or, even if one can actually target the fine the responsible demographic, you're fining them for having done something that was perfectly legal when they did it. This is obviously a bad practice, to change the law then punish people for having done what wasn't illegal at the time.

Perhaps Scott thinks that, if the fine/tax is dispersed enough (e.g., everyone in society has to pitch in a few cents to compensate a small group of people), the unfairness of it becomes negligible?

Thaomas writes:

If you look at the violence generated by efforts to curb supply of criminalized drugs in countries like Mexico (and earlier Colombia), it's hard to believe that the "biggest losers" are US consumers or non-consumers.

Matthias Goergens writes:

The argument about prohibition not harming the supply side in a competitive market with easy entry and exit at most applies to the whole industry, but not necessarily to individual retail dealers.

The victims of organised crime are the retail dealers who have to fork over some of their surplus. 'Franchises' are often enforced with violence, and the street level dealers have no recourse to the law enforcement to help them.

Yes, they can still exit the industry, etc. But the narrative is very similar to talking about eg a very combative guild or union defending licencing rules with force and the law turns a blind eye.

Well---actual consumers lost a rectangle, potential consumers who were deterred lost a triangle, and for small price changes, rectangles are bigger than triangles.

But presumably anti-drug legislation caused not a small change in the price of drugs, but a big change. The bigger that change, the more likely it is that the triangle exceeds the rectangle. (This also depends, of course, on the shape and location of the demand curve.)

So I contend the following:

1) You might be right about who the big losers were.

2) But you could also quite plausibly be wrong.

3) In any case, the key observation is that the losers are on the demand side, not the supply side, and are therefore very difficult to identify and compensate. This holds true whether you're right or wrong.

James Pass writes:

I have to hand it to Thaomas: If we're looking for the Biggest Victims of the US Drug Wars, we should look outside of the US.

Abe writes:

The "spirit of the question" is to treat threat of legal trouble and monetary cost as interchangeable, but in fact they aren't. If you imagine current drug prices as having one component that is money and another component as being risk of legal consequence, the change in price after legalization would likely be a small decrease in monetary price and a total elimination of legal risk. Since current actual consumers are probably disproportionately people with a higher utility of money and a lower disutility of legal risk, it's plausible that the benefit would be greater for potential consumers even as individuals.

But again, I think this point is sort of beside the spirit.

Market Fiscalist writes:

I think Steve Landsburg states it exactly right on consumer surplus.

But what about producer surplus ? Isn't that reduced by the anti-drug legislation so that drug dealers too are also victims of these policies along with consumers ?

Eli writes:

Yea this seemed a little dubious. Ignoring the dubious statement that those most hurt by the drug war are the users (it's usually the victims of the literal war in the cartel lands of Mexico and South America), artificial inflation has actually been caused by the legalization of drugs, not the "artificial" inflation of the illegality. With pretty much everyone now able to buy and sell, prices have risen drastically at legal establishments, while dealers have actually lowered their standards prices, turning drugs into a nomal good. Baisically more people selling means that people can either sell high or sell low, and find their niches because the differen drugs actually have different supply and demand curves (dispensary vs dealer) it's actually very interesting

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