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Informing America’s Policy on Illegal Drugs: What We Don’t Know Keeps Hurting Us
These data have been used to evaluate the price effects of the current prohibition environment. Only part of the price markup from farmgate to retail can be attributed to enforcement of prohibition; after all, bringing drugs to market incurs real resource costs. The question is: How much?
Several researchers have used aggregate data on seizures (both drugs and other assets), incarceration rates, and estimated wage rates to make educated guesses on the part of the markup that is due to enforcement of prohibition. Caulkins and Reuter (1998) argue that risk compensation accounts for over half of the total cost of production, while seizures and money laundering fees account for another 10–15 percent of production costs. Thus, they estimate that enforcement accounts for about 60–70 percent of the retail price of cocaine. Miron (1999) finds that arrests and seizures account for as much as half the illegal price, but that these costs are nearly offset by tax and regulatory costs incurred in legal markets. Any markup, Miron argues, must be due to “secrecy cost” (i.e., nontrivial actions taken to avoid detection) that he does not evaluate.
Other analyses compare the price markups in the production process for cocaine with markups for agricultural commodities that may be comparable to cocaine. Caulkins and Reuter (1998) suggest substantial price markups similar to those observed for cocaine are consistent with some goods (e.g., the farmgate value of wheat in a box of shredded wheat is about 2.5 percent of the retail price) but not others (e.g., the border value of a pound of sugar is about 50 percent of the retail value). Miron (1999) claims that all kinds of common agricultural products (e.g., cocoa, coffee, tea, beer) have farmgate-to-retail markups comparable to that of cocaine. For example, the price of raw coffee beans in Colombia is $0.75 per pound, while the per-pound price of espresso at Espresso Royale in Boston is $111.30.
Of course, Miron’s conclusion rests on his assumption that the Espresso Royale retail price is the relevant measure. The per-pound price of a cup of coffee at Dunkin Donuts is $25.43, and the retail price of Roaster Whole supermarket beans is $6.36 per pound. Whether one should measure the retail price at Espresso Royale, Dunkin Donuts, or the supermarket is an open question. If restricted to supermarket prices, beer is the only good for which Miron finds markups similar to cocaine, and for it taxes are usually a big component of the markup.
In any case, the relevance of these comparisons between cocaine and legal agricultural commodities is not clear. The reasons for the coffee markup and the cocaine markup are likely to be very different. For illegal drugs, a relatively substantial fraction of the costs may be due to risk and asset seizures. For legal agricultural commodities, a relatively large fraction of costs are associated with marketing (e.g., packaging and advertising), taxes, and regulations.