Lecture Issues in economics today - Chapter 17

When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.
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Lecture Issues in economics today - Chapter 17 Chapter 17 Drugs and Prostitution McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Chapter Outline • AN ECONOMIC MODEL OF MARKET FOR DRUGS AND PROSTITUTION • ARGUMENTS FOR MAKING A GOOD ILLEGAL • DECRIMINALIZING DRUGS AND PROSTITUTION McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Consumer and Producer Surplus Analysis P • Value to the Consumer: A Supply • 0ACQ* • Consumers Pay Producers: • OP*CQ* P* C • The Variable Cost to Producers: • OBCQ* B • Consumer Surplus: Demand • P*AC 0 Q* Q/t • Producer Surplus: • BP*C McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The Importance of Elasticity • If people are addicted to a particular drug, their demand for it will be inelastic. • Drug interdiction efforts shift the supply curve to the left. • This will cause prices to rise – Addicts will not reduce quantity demanded much – Recreational users will reduce quantity demanded more McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Arguments for Making a Good Illegal • People have limited information about the good, are not capable of making a good decision about the good or the good is addictive and one-time users can not learn from their mistake. • There are externalities, effects of a transaction that hurt or help people who are not a part of that transaction, involved in the production or consumption of the good. • The good is immoral. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Preventing Bad Decisions • Economists are typically reluctant to assume that people can not make good decisions. • Drugs tend to be an exception to this rule because they are addictive. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Modeling Externalities SocialCost P ExternalCost SMarginalCost P’ P* D(MarginalBenefit) 0 Q’ Q* Drugs/Prostitution McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Examining the Externalities • 30% of all violent crimes (38% for rapes) are committed while the perpetrator is on drugs. • 80% of inmates in jail, detention, or prison used drugs during the month leading up to their arrest. • there are nearly 23,000 drug-related homicides every year. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Battling Negative Externalities While Creating Others • Much of the drug violence that exists, only exists because of laws criminalizing drug use. • If cocaine, methamphetamine, and marijuana were legal and inexpensive, – there would be less of a need for addicts to rob in order to get money to buy them. – there would be no drive-by shootings to protect turf. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The Impact of Decriminalizing Drugs or Prostitution P Sillegal Slegal Pillegal Plegal Dlegal Dillegal Qillegal Qlegal Q McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Substituting Taxation for Criminalization Social Cost P S (Marginal Cost) } Tax=External Cost P’ P* D (Marginal Benefit) O Q’ Q* ...