Drug-related "Externalities" Are Mostly Internalized

In an earlier post, I argued that the "drug use leads to externalities" argument is wrong. I think I was mostly right, but my conclusion was stated too strongly.

I was reasoning from the example of a perfect tax on pollution. The purpose of the tax is to make the polluter feel the total social cost of his pollution. If you are allowed to pollute tax free, you will pollute more than the optimum amount. But the optimum amount of pollution isn't zero. We all want automobiles and cheap transport and indoor heating and cooling and consumer goods and all the other things that entail some amount of industrial pollution and burnt fossil fuels. So you don't outright ban pollution but you don't let people pollute without limit. You set a tax that deters pollution to the optimum level. (Perhaps the tax is used to fund clean-up or to compensate the victims of the pollution, or perhaps the deterrent effect of the tax is its sole purpose.)

My argument is that the anti-social behaviors that are supposedly caused by drugs are already illegal.(This is beside the point, but that causal link is incredibly speculative and highly dubious; the vast majority of drug users aren't criminals and those who are have personal problems that began prior to any drug use.) If there's a small chance that taking a hit of crack will turn you into a killer, that cost has already been baked into the total cost of using the drug. The externalities of drug use have already been internalized.

Well, it turns out that's a little too strong. In the case of a pollution deterring tax, you can use the revenue to compensate the victims. In the case of a legal penalty (like jail time for assault, theft, murder, etc.), there is no revenue. The cost of the penalty is something that is simply lost to society, whereas a tax is transferred from one party to another. Someone can pollute all he wants in the efficient pollution tax regime and never do any harm. But if someone goes on a crime spree to support his drug habit, there is a net loss to society that never really gets repaid.

While it's an exaggeration to say that drug-related externalities are fully internalized, I think it's fair to say they are mostly internalized. If we could do a better job of getting criminals to compensate their victims, it'd be closer to the efficient pollution tax example.