Sunday, February 28, 2016

Overpenalization of Drug Use


In this post I’ll examine the economic consequences of “overpenalizing” drug use. Refer back to my previous post (here) for the starting point of this discussion. This post is a continuation of the ideas in that one.

If we embark upon a policy of drug prohibition, we risk penalizing a harmless activity. The public’s views of drug-related dangers are distorted, and mistaken or cynical politicians respond to these distorted perceptions of risk. The average voter believes that harmful drugs are far more dangerous than they actually are, and they wrongly believe that some harmless drugs are harmful. I won’t specify which drugs have exaggerated harms or describe in detail the degree of the public’s distorted perceptions. We need not agree on the particulars. We can still agree that there is an enormous risk of harm if we overpenalize.

Supply and Demand Curves

The graph below shows the supply and demand curves for drugs with exaggerated harms. The marginal private benefit is actually equal to the marginal social benefit, but the voting public mistakenly believes there are big social costs to drug use. The dotted black line represents the public’s distorted perception of drug-related harms; a fully informed public would see this line as overlapping the solid black line. (Reiterating a point from the previous post: The red line, the “marginal social cost,” is the supply curve. It represents the costs of supplying the drugs to the consuming public.)

The World As It Should Be

The chart below spells out the welfare implications if policy is as it should be. If we don’t penalize drug use (as we shouldn’t in this example), total welfare is simply the areas of A’ + B’. Triangle A’ is the consumer’s surplus, and triangle B’ is the producer’s surplus. You can take this chart to represent a world where the drug really doesn’t have any externalities, or you can take it to represent a world where a drug with externalities is appropriately penalized with an ideal tax. The welfare implications are the same. (See previous post for details.) The next section considers adding an *additional* penalty on top of that.

The World As It Is

Now we look at a world where the public irrationally overpenalizes drug use, which is much closer to the world we live in. There is a prohibition regime, and the MPB is lowered so it overlaps the (public’s misperceived) MSB. The consumer and producer surpluses have both shrunk. The area C represents the penalty applied to drug users. It is a pure loss. Drug users are harassed (jailed, imprisoned, beaten, etc.), and there is no offsetting benefit here, as there would be if drug users were taxed instead. Triangle D is a deadweight loss associated with the loss of consumer and producer surplus. Total welfare in this case is A + B. If we hadn’t penalized drug use, the total welfare would have been the full area A + B + C + D (A’ + B’ in the graph above). Society loses D + C. There is quite a lot to lose from overpenalizing drug use.

(Edited 3/1/2016. I had made an error in my initial analysis, in which C was lost twice. I should have suspected an error. I believe it's correct now.)

If we’d over-taxed rather than overpenalized, it wouldn’t be quite so bad.

Overtaxing vs Overpenalizing

Suppose we deter the unwanted drug use with a tax rather than a penalty. The welfare consequences aren’t *quite* as bad, because in this case somebody at least collects the taxes paid by the drug users. Total welfare is A + B + C. Area C is tricky. Drug users enjoy a consumer surplus equal to C, but they pay a tax equal to it's value, but society collects that tax. It's a surplus, plus a pure transfer. So C - C + C = C. Triangle D is still a deadweight loss. So social welfare is A + B + C + D in an untaxed world, but A + B + C in a taxed world. The loss is D. It’s not as bad as losing C + D, but still unfortunate.

(I've edited the paragraph above to correct my initial over-counting. I initially thought that society lost C in the overtaxing regime, but I believe I was mistaken.)

The Cost, In Plain English

Whether we deter drug use with a tax or a penalty, the implications are the same (in kind if not in magnitude). Some thrill-seekers are denied a harmless pleasure for no good reason (the loss of consumer surplus). And some perfectly respectable jobs and businesses are destroyed, again for no good reason (the loss of producer surplus). Suppose you can’t bring yourself to care about the interests of drug users or producers, *even though* I’m specifying that we’ve misidentified a harmless drug as harmless. Fine, then imagine for a moment that we’re talking about penalizing, say, country music or video games or ceramic Siamese cats, or whatever guilty pleasure you happen to indulge. Surely you understand that the government shouldn’t go around deterring popular-yet-controversial hobbies willy-nilly.

When we evaluate drug policy, we need to factor in this potential cost of overpenalizing. If we misidentify a harmless drug as harmful, that might sound like an inexpensive error. One might dismiss it with a “better safe than sorry.” But it isn’t free, and it isn’t even cheap. Some people will continue to use the banned drug, and those remaining users still face the stiff, dehumanizing penalties. The people who are successfully deterred are denied a cheap thrill. I think it’s benighted to treat these costs as trivial. To blow this off is to blow off every encroachment of government into our private affairs. Policy makers need to fully consider the possibility that they have exaggerated a problem, and the costs of an inappropriate policy response needs to be given the same consideration as any other risk. Government overreaction is a serious problem. A bit of epistemic humility would temper it a great deal.

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