Supply and Demand in the Cocaine Industry

The Wall Street Journal’s Informed Reader has picked

up an interesting article on cocaine in the Atlantic (behind a subscription

firewall here).

Apparently the street price of a gram of cocaine is now down to $20, down from

$200 in the late 1990s and $600 in the early 1980s. And yet, despite some of

the steepest price drops the world has ever seen, demand for the drug is no

better than steady.

There are two supply-and-demand questions here. The first is the one posed

by the Atlantic’s Ken Dermota: if supply is falling and demand

is steady, how can the price of cocaine be falling? But the second one is also

interesting: if the price is falling so dramatically, how come demand isn’t

going through the roof?

Ex post, I’m sure it’s possible to come up with some story about how

people just aren’t that into cocaine any more, or they’re more conscious of

the dangers of cocaine addiction, or things along those lines. And I’m sure

that there are interesting stories to be told about the rise and fall of the

crack epidemic, as well. But the price of cocaine seems to have been falling

quite steadily and quite regardless of the level of demand from crack addicts,

and the other factors don’t on their face seem strong enough to repeal basic

laws of economics.

There’s a large faction of economists who love to say that raising the minimum

wage must also raise unemployment, because of the way that supply and demand

curves work. I wonder what they would have to say about the cocaine situation.

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