Case 1: The market for drugs

Supply, demand, and equilibrium: The market for drugs.

Suppose the market for drugs is a perfectly competitive market.

Let the supply curve S be upward sloping, for instance:

S: p = 500 + 112 . y,                where p = price and y = quantity.

Consider two versions of the demand curve; the demand curve Dl is vertical (quantity does not v~ with the price) and the demand curve D2 is downward sloping. For instance:

Dl: y = 1000,                            D2: p = 2000. 000/y -1000

Suppose the authorities have 3 goals concerning the drug market:

Gl : A reduction in the consumption of chugs.

G2 : A reduction of the drug-induced criminal activity.

G3 : A :reduction of the emergence of organized crime connected with the (illegal) sale of drugs.

a) Give the three goals Gl, G2 and G3 some interpretations within this framewo:tk, given that the market for drugs is a competitive market.

(U se diagrammatic explanations and/or the specifications of Sand D1 and D2 given above.)

Suppose the authorities have 4 policy-instruments at their disposal:

PI : Increased punishment and/ or increased probability of getting caught for drug-pushers.

P2 : Legalize the sale of drugs.

P3 : Distribute drugs for free.

P4 : Decrease the demand for m.'1lgs.

b) What could be the interpretations of PI - P4 within this model?

c) Discuss (at least) some of the consequences ofP1 - P4 on Gl - G3, if either Dl or D2 is valid.