TAILIEUCHUNG - THE ECONOMIC THEORY OF ILLEGAL GOODS: THE CASE OF DRUGS

But there are also non-health-care industries in the list, creating a broad set of opportunities for workers. Figure 2 shows strong growth in construction. This is a broad industry that includes the construction of manufacturing and retail buildings, roads and bridges, utility systems, and homes. The ARRA will contribute to construction employment growth in the next few years through direct investments and incentives for private investment in infrastructure, the construction of power and communication structures, and the weatherization of homes. Another area of growth is air transport. An important occupation in this industry. | NBER WORKING PAPER SERIES THE ECONOMIC THEORY OF ILLEGAL GOODS THE CASE OF DRUGS Gary S. Becker Kevin M. Murphy Michael Grossman Working Paper 10976 http www .nber. org papers w10976 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 December 2004 The views expressed herein are those of the author s and do not necessarily reflect the views of the National Bureau of Economic Research. 2004 by Gary S. Becker Kevin M. Murphy and Michael Grossman. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. The Economic Theory of Illegal Goods the Case of Drugs Gary S. Becker Kevin M. Murphy and Michael Grossman NbEr Working Paper No. 10976 December 2004 JEL No. D00 D11 D60 I11 I18 ABSTRACT This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods but they also depend crucially on the elasticity of demand for these goods. In particular when demand is inelastic it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs. Gary .

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