FIGURE 1

RAND model of long-run market supply and demand for cocaine in the United States.

varies inversely with its price. The unusual feature of Figure 1 is that the market supply curve also slopes downward. The RAND study bases its downward sloping supply curve on three assumptions. The first assumption is that the price at which a given quantity of cocaine is supplied to the market equals the average cost per unit of producing this quantity (Rydell and Everingham, 1994:53). This assumption is standard in the long-run analysis of competitive markets because free entry and exit of producers implies that profit must be zero for the marginal producer (Panzar and Willig, 1978). In this framework, the market supply curve in Figure 1 measures the average cost of producing any given quantity. The second assumption in the RAND study is that the resources used in the production of cocaine are available to producers at a constant price per unit, regardless of how much of these resources are used in the production of cocaine (pp. 52, 95). Hence, the marginal cost of producing an additional unit of cocaine does not change with the quantity produced. The third assumption is that supply-control policies generate production costs that grow at a slower rate than output (pp. 53, 95): As production rises, the ratio of seizures to the quantity of cocaine produced falls. Hence, the second and third assumptions together imply that average cost declines with quantity produced.

In the RAND model, cocaine control policies would reduce the con-



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