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Posts Tagged ‘drugs’


In many cases, we simply leave the market to do what it does best – equate demand with supply and from this we get an equilibrium price and the optimal quantity. But, what happens if either the price or quantity is ‘incorrect’? What happens if the market fails to deliver an efficient outcome? In this case, we look to governments to intervene and ‘correct’ the market and such intervention can take place on the demand and/or supply-side. One area where it is generally felt that government intervention is needed is drugs and the trafficking of them across borders.

There are many ways in which governments have tried to tackle the problem of drug usage. The issue is that drugs are bad for individuals, for the community, society and the economy. Too much is produced and consumed and hence we have a classic case of market failure and this justifies government intervention.

But, how should governments intervene? With a substance such as drugs, we have an inelastic demand with resepect to price – any increase in price leads to only a small decrease in quantity. So any policy implemented by governments that attempts to change the market price will have limited effect in restricting demand. With globalisation, drugs can be moved more easily across borders and hence global co-operation is needed to restrict the flow. The article below considers the area of drugs and drug trafficking and looks at some of the policy options open to government.

Narconomics: The business of drug trafficking Houston Chronicle (16/3/16)


  1. Why does the market fail in the case of drug trafficking?
  2. Draw the demand curve you would expect for drugs and use this to explain why an increase in price will have limited effect on demand.
  3. Is there an argument for making drugs legal as a means of raising tax revenue?
  4. If better educational programmes are introduced about the perils of drug usage, how would this affect the market? Use a demand and supply diagram to help explain your answer.
  5. Why does globalisation make the solutions to drug trafficking more difficult to implement?
  6. Could drug usage and drug trafficking and hence the need to invest more money in tackling the problem actually boost an economy’s rate of growth? If so, does this mean that we should encourage drug usage?
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Sex and drugs add to GDP

The most commonly used measure of economic performance is GDP and while there is agreement that it is an important and useful measure, there is also agreement that there are some big problems with it. Does it measure welfare or quality of life? What is and isn’t included? Do some things add to GDP which actually make us worse off?

One criticism often levelled at GDP is that there are many aspects that go unmeasured – often known as the underground economy. Some areas are typical everyday things – DIY, looking after your own children rather than paying someone to do it, or even giving yourself a haircut. But, there are other activities, often illegal, which go unrecorded, such as the selling and distribution of drugs and prostitution. In countries like the Netherlands, their GDP figures get a boost, as some drugs and prostitution are legal. In other countries, such data is not recorded and as such, the contribution of these markets is under-estimated or even completely omitted.

However, this aspect of the calculation of GDP statistics is changing across Europe, which will allow much easier and more meaningful comparisons of relative GDP across countries. This extra production will therefore offer a positive contribution towards our GDP and perhaps suggest to the untrained eye that the British economy is growing, which can only be good news. But, for the trained economist, we are looking at extra data being added, which will boost total output and the question will be does it really indicate that the economy is better off? The following articles consider this change to GDP.

Small data: The way drugs and prostitution boost the economy BBC News (4/4/14)
Small data: Calculating the sex and drugs economy BBC News (2/6/14)
UK economic output to be revised up after ONS updates BBC News, Anthony Reuben (10/6/14)
UK economic output will get near 5 percent boost from data changes Reuters (10/6/14)
Accounting for drugs and prostitution to help push UK economy up by £65bn The Guardian, Katie Allen (10/6/14)


  1. What does GDP measure? Is it good at measuring it?
  2. Explain the pros and cons of using GDP to measure the welfare of an economy.
  3. Why are there problems using GDP to compare output between countries?
  4. Is it a good idea to include markets such as sex and drugs in calculating a nation’s output?
  5. What other measures of welfare do we have?
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