else being equal. This motivates analysis that attempts to relate enforcement activities to domestic drug prices.4
Figure 5.1 portrays the standard economic reasoning. The curve labeled “Demand” shows the quantity of a drug that consumers wish to purchase at any given price, and the curve labeled “Supply0” shows the quantity that producers are willing to sell at any given price. The intersection of the supply and demand curves is the market equilibrium: the price P0 at which the quantities demanded and supply are equal, so that the market is in balance. If the government were to intensify interdiction, domestic enforcement, and other supply-reduction activities, the cost of production would rise and thus shift the supply curve up. The result, everything else being equal, would be a new equilibrium with a higher price (P1) and lower consumption (Q1). This is the classic view of the effect of supply-reduction policy on the market.
A formal impulse-response analysis of supply reduction policy was performed in the Institute for Defense Analyses (IDA) study (Crane et al., 1997) assessed by the committee in its Phase I report. This research sought to connect specific interdiction activities (what we refer to as the impulse) to particular subsequent domestic drug price fluctuations (what we refer to as the response). It also sought to connect aggregate spending on interdiction (the impulse) to long-term trends in domestic drug prices (the response). Informal use of impulse-response analysis is common in public discussions of supply-reduction policy. Time-series data describing spending on enforcement are often juxtaposed with data on drug prices, the idea being that the effects of enforcement should be seen in the price data.
We first examine issues that arise in impulse-response analysis relating specific enforcement activities to particular fluctuations in domestic drug prices. We then consider in some depth the use of long-term trends in domestic drug prices to assess the effectiveness of supply-reduction policy writ large.
Public officials sometimes call attention to the magnitude of drug seizures and suggest that seizures show the success of enforcement. However, there is no clear way to relate seizures to drug supply. Seizures may induce traffickers to initiate new shipments to replace goods captured in transit, in which case the quantities of drugs entering the United States and reaching local markets may fall by much less than the amount seized, perhaps not at all. Or seizures may increase traffickers’ perceptions of the riskiness of the drug trade, and so deter them from initiating new shipments. If so, drug quantities may fall by more than the amount seized. We do not know the extent to which replacement occurs or the magnitude of the deterrent effects of enforcement. Hence data on seizures alone should not be used to judge the effectiveness of enforcement.