What are effective public policies for the heroin market?

• Principles of Microeconomics course. Students should be familiar with the supply/demand model and price elasticity of demand.
• It may be helpful to inform students about the heroin market: the raw materials used; influence of organized crime; and health risk of heroin use.
• No class size limits.
• Activity takes about 30 minutes.

Overview

Student teams use a supply/demand model for the heroin market to analyze public policy approaches. Because inelastic demand, policies that affect supply have different effects than policies affecting demand. Teams must justify one policy choice as most effective.

Expected Student Learning Outcomes

Students will be able to use a supply/demand model to identify price and quantity changes that occur as a result of public policies.

Information Given to Students

Given the following supply/demand model for the U.S. heroin market, what will be the most effective government policy?

Diagram showing inelastic demand

Be prepared to justify your answer with reference to this diagram and any changes to it that chosen policy will cause to the price of heroin and the quantity available in the market.
Note that even though this is an illegal market, nonetheless there are buyers with a demand schedule and sellers with a supply schedule, and a market that will tend to move to an equilibrium price as shown in the preceding diagram.

Which policy should the federal government pursue?
A) Longer prison terms for heroin sellers
B) Increased border controls to prevent imports of heroin
C) Subsidies for drug user rehabilitation programs
D) Subsidies for education efforts dissuading use of heroin
E) Legalization of the heroin market

Heroin market (Microsoft Word 2007 (.docx) 20kB Feb11 18)

• Students may need background information on heroin: raw material, opium poppies used to produce it; relative ease of production; current control by organized crime groups; relatively less use by youth; impact of users (addiction; disease transmitted by needles; overdose danger; lethargy and social withdrawal)
• It may be helpful to alert students to the inelastic demand for heroin as indicated in the diagram.

Correct answer(s) along with brief explanation of rationale(s)

• Answers A and B will cause supply to shift to the left. Prices will rise considerably, quantity demanded will fall only a little. Incomes for drug sellers will rise. Crime by drug users may rise. Amount of shift and net effect of these results is debatable.
• Answers C and D will cause demand to shift to the left. Prices will fall and quantity at equilibrium will fall. Incomes for drug sellers may fall; crime by drug users may fall. Amount of shift and net effect of these results is debatable.
• Answer E will cause supply to shift far to the right; demand will shift to the right but perhaps only slightly. Prices will fall considerably; quantity at equilibrium will rise. Income for drug sellers will fall; crime by drug users will fall. Amount of shift and net effect of these results is debatable. May be different effects on young versus older buyers.

Students can be asked to evaluate other social policy responses including response to other drugs such as marijuana with different price elasticities of demand.