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Informing America’s Policy on Illegal Drugs: What We Don’t Know Keeps Hurting Us
more money to buy higher-priced drugs. A policy that has such effects is counterproductive. In contrast, if demand is highly sensitive to price, then policies that increase drug prices will cause desirable decreases in consumption and sellers’ earnings.
Recent estimates of price elasticities of demand for cocaine and heroin vary widely, although several studies report elasticities that are quite high (that is, the elasticities may have large negative values).4 Caulkins (1995) obtained price elasticity estimates of –2.5 and –1.5 for cocaine and heroin, respectively. Saffer and Chaloupka (1995) estimated the price elasticity of participation (that is, the fraction of individuals who use an illegal drug) to be in the range –0.8 to –0.9 for heroin and –0.4 to –0.6 for cocaine. Grossman et al. (1996) estimated the long-run price elasticity of participation in cocaine use to be in the range –1.3 to –1.6, and estimated the long-run price elasticity of frequency of use conditional on participation to be –0.5. Chaloupka et al. (1998) obtained estimates of cocaine participation elasticities by youths in the range –0.2 to –1.0. The elasticity of frequency of use conditional on participation was in the range –0.3 to –0.5, and the estimated elasticity of demand was in the range –0.6 to –1.5. In summary, recent estimates of the price elasticity of demand for cocaine span a range of –0.6 to –2.5.
It is difficult to know how one should judge the various estimates of price elasticities of demand for cocaine and heroin. In addition to spanning a very wide range, they all suffer from a variety of severe conceptual and data-related difficulties, which are described below. The effects of these problems on estimation accuracy are unknown. Accordingly, existing estimates of demand functions and price elasticities should be treated as only suggestive. Certainly, none can be extrapolated to an environment in which prices for illegal drugs are much lower than they are now (due, for example, to a reduction in the penalties for possession, distribution, or sale).
Why Estimating Demand Functions and Price Elasticities Is Difficult
In the committee’s judgment, the severe, unsolved conceptual and data-related problems involved in the estimation of demand functions for illegal drugs mean that no persuasive demand function for cocaine or other illegal drugs has yet been estimated. The problems with existing estimates include:
Caulkins and Reuter (1998) and Saffer and Chaloupka (1995) review earlier elasticity estimates. These vary widely but tend to be closer to zero than are more recent estimates.