If you are troubled by opium production in Afghanistan, Jeff Clemens at Harvard has some bad news for you: eradication efforts are doing little to reduce opiate production. (ht: Tyler Cowen at Marginal Revolution). Moreover, to the extent they are having an effect, it’s to drive up prices and thus enrich the farmers who illicitly grow poppies.
I mention this not only because I find it interesting, but also because it nicely illustrates one of the ideas that I teach my microeconomics students. When you think about policy interventions – in this case poppy eradication efforts – it’s important to understand both the qualitative impacts of the intervention and the magnitude of those impacts.
Your basic supply and demand model will tell you, for example, that eradication efforts will shift the supply curve left (up), resulting in higher prices and lower production. To gauge the relative importance of those two changes, you need to know something about demand. And in this case, the key fact is that demand (from other countries, not Afghan consumers) responds very little to price. In the lingo, opium demand is very price-inelastic (Jeff estimates the elasticity at about -0.09). As a result, efforts to restrict supply translate primarily into price increases, rather than production declines.
The same problem has bedeviled U.S. efforts to restrict illicit drugs. (For example, see this old New York Times editorial about cocaine, which I use in my class – the editorial that is, not cocaine itself.) I haven’t followed the debate in recent years, but my sense is that many observers concluded that demand-side policies (i.e., discouraging consumption) were often a better strategy than supply-side policies. After all, successful demand-side policies would lower both consumption and price, thus lowering profits from drug production.
Given Jeff’s results, I suspect the same may be true in the world of opium production. If policymakers want to reduce consumption, they may want to turn to demand-side policies (assuming, of course, they can design demand-side policies that would have a substantive effect).