· Drug Prohibition
o Note:
§ Hidden costs exists with the tax (regulators, policemen, etc.) that are resistant to change (i.e. they don’t go away)
§ Someone always has an interest in an object being made illegal
o Drug law enforcement arrests 1.2 million possessors annually
o We are attempting to stop drug use, but there is still a LOT of drug use
o Over 50% of drug arrests come from arrests other than drugs as an ancillary
o Prohibition can actually cause more drugs
§ Producers don’t have to pay for benefits they would if they were legitimate
§ More incentive to make the drugs
o Cocaine:
§ 1980: $45 per gram
§ 2011: $30 per gram
o When drug prohibition increases, so do violent crimes in all aspects and gang violence
o Mexico:
§ 40,000 deaths in five years
· Ten times those who have died in Iraq
§ Typical life costs $5 million
§ Which means…$200 billion in life cost
§ PAN heavily against drugs
§ PAN-elected mayors are ultra aggressive against drugs and this leads to a 20% gang violence within the next year in their city because gangs compete for new land that was made vacant by the mayor
o Many laws that are meant to help with drug prohibition actually cause more crimes in other way
§ Ex: Three strike law in California, you have two… no one can know you commit a crime so you kill a guy who sees you commit it instead of overlooking it
· Two-strikers have a lower marginal cost for committing the next worst crime
o Why did prohibitions happen?
§ Depressions and recessions
· No one cares about the illegal substances when the economy is great
· However, depression caused the government to want to go back to taxing liquor, which had been common before 1913 (income tax)
· Income taxes drop in order to help the people, and then the prohibited substance becomes legal and taxed
· Excise Tax (Bubble Gum Market)
o Taxes are neutral, they aren’t a benefit or a cost
§ Taxes are just a transfer
§ Taxes are just hard to do
o Governments who need money usually find additional things to tax
o Excise tax: The legal liability for the tax is on the seller
§ I.e. the seller has to write the check for the product
§ The buyer does not have to do anything
o Equilibrium would shift price upwards
§ Increases at the same rate as the tax
o Example of excise tax (bubble-gum) ($1 tax to raise 3 million dollars)
o Initial Equilibrium:
§ P=$3
§ Q= 3 million
o After-tax equilibrium
§ Pbuyers= $3.75
§ PSellers= $3.75
§ Q= 2.75 million
§ Taxes: $2.75 million
Buyers | Sellers | |
Initial Price | $3.00 | $3.00 |
New Price | $3.75 | $3.75 |
Taxes | None | $1.00 |
Economic burden | $0.75 | $0.25 |
o Why didn’t the tax increase generate as much as anticipated?
o Who pays the tax?
§ Both buyers and sellers
§ Economically, the burden of the tax is on the buyers more than the sellers
o You have prevented people from buying the good they desire (see graph)
§ Would’ve made the world richer with the extra transactions
§ Creates dead weight loss
· Triangle between new equilibrium quantity line between the new equilibrium price and the old price (triangle points right)
No comments:
Post a Comment