TY - JOUR AU - Becker,Gary S. AU - Murphy,Kevin M. AU - Grossman,Michael TI - The Economic Theory of Illegal Goods: The Case of Drugs JF - National Bureau of Economic Research Working Paper Series VL - No. 10976 PY - 2004 Y2 - December 2004 UR - http://www.nber.org/papers/w10976 L1 - http://www.nber.org/papers/w10976.pdf N1 - Author contact info: Gary Becker Department of Economics University of Chicago 1126 East 59th Street Chicago, IL 60637 Tel: 312/702-8254 E-Mail: gbecker@uchicago.edu Kevin M. Murphy Booth School of Business The University of Chicago 5807 S. Woodlawn Ave. Chicago, IL 60637 Tel: 773/702-7280 Fax: 773/834-3554 E-Mail: murphy@chicagoBooth.edu Michael Grossman Ph.D. Program in Economics City University of New York Graduate Center 365 Fifth Avenue, 5th Floor New York, NY 10016-4309 Tel: 212/817-7959 Fax: 212/817-1597 E-Mail: mgrossman@gc.cuny.edu AB - This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs. ER -