Yonatan Zunger (zunger) wrote,
Yonatan Zunger
zunger

A stupid quote

From the Washington Post today:
Authorities and people familiar with the drug trade say violence in Mexico and increased enforcement -- symbolized by the Flores case -- are having a dramatic effect on Chicago street sales, at least for now. The wholesale price for a kilo of cocaine -- about 2.2 pounds -- has spiked over the past 18 months, from $18,000 to $29,000 and often more, according to authorities.
I wonder if the unnamed "authorities" in question are being deliberately misleading, or if they simply lack the sense to notice what they just said. The increase in the wholesale price of cocaine ends up, as such increases normally do, in the pockets of the people selling it.

What they have just said is that increased enforcement has increased profits for drug lords dramatically.
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zunger

December 31 2009, 08:41:17 UTC 5 years ago

I would analyze as follows. There are two different things which enforcement is doing -- reducing supply (by confiscating and burning it), and increasing operating costs for producers. (By adding non-financial risks such as arrest and/or shooting of the people on the ground) The former is likely to be a very small effect; I doubt that total drug seizures are going to be a double-digit percent of all the drugs on the street. At first order, at least, we can ignore it.

Increased opex acts like a tax on the product, although since this is a non-financial tax it works in a strange way: the government doesn't get any money for it. It's "paid" (in the direct sense) by the people who get arrested and/or killed, which is probabilistically and rather non-uniformly distributed; in particular, it's paid in blood by the low people on the totem pole, and in increased costs of security/bribes/etc by the people higher up.

The incidence of this tax, and its effect on the quantity sold, is determined by the fact that demand for narcotics is incredibly inelastic (people will buy drugs rather than food), while supply is very elastic. (It's not hard for a major producer to grow more or less cocaine) That means that (a) the tax is effectively paid for by higher prices to the consumers (they're very inelastic), and (b) the effect on quantity sold is going to be minimal, since the demand curve is really steep.

So in a market like this one, imposing a larger operating cost on suppliers will drive up prices considerably; this difference will be paid for by the consumers, and will ultimately flow to the providers of security, bribes, and so on.

Good times to be a corrupt official, I guess...

xthread

December 31 2009, 17:06:36 UTC 5 years ago

I doubt that total drug seizures are going to be a double-digit percent of all the drugs on the street.

And if they were having that impact, that is so significant a result that it would be one of the talking points. It's not, ergo, they're not.

covenantscave

December 31 2009, 20:10:42 UTC 5 years ago

I don't think they (or anyone else) has any clue WRT the quantity of drugs on the street.

Messing around with supply via law enforcement is by all accounts largely a waste of time and resources, but it's politically easy. All serious, credible reviews I've ever seen have all pointed to fundamentals (education, employment, and frankly, therapy) as the real solution. But that's work, takes time, and isn't glamorous

So, you attack the supply curve and point out that you are moving the needle there by talking about how much more expensive it is.

As an aside, Freakanomics has a really good analysis of gang finances due to an unusual capture of the books of a gang. Interesting reading.