Fighting drugs
Chicago is one of the largest cities in the United States with an estimated population of 2.7 million. Located on the shores of freshwater Lake Michigan, Chicago is an international hub for finance, culture, commerce, industry, technology, and transportation. The University of Chicago boasts one of the best economics departments in the world, with at least 30 Nobel Prize winners affiliated with the department. Unfortunately, the city of Chicago has had a serious problem with drug (narcotic) consumption and drug trafficking.
In 2012 alone, there were more homicides in Chicago than in any other metropolis in the United States — a total of over 500, most of which linked to gang violence. According to reports in 2013, "most of Chicago's violent crime comes from gangs trying to maintain control of drug-selling territories", and is likely related to the activities of the Sinaloa Cartel, one of the most powerful Mexican drug cartels, which by 2006 sought to control illicit drug distribution.
Chicago's reputation of a drug trafficking city costs it billions of dollars every year in lost consumption, investment, and unnecessary spending. Chicago public policy officials aspire to reduce drug consumption as it produces negative externalities, which harm the society as a whole, not just the drug addicts.
a) (10 rp) Name at least four negative externalities of drug consumption. Be specific and discuss how, and to what extent, they harm society. Can you think of any positive externalities of drug consumption? Elaborate.
An externality is the cost or benefit that affects a third party, so one who did not choose to incur that cost or benefit. Drugs in the question concerned illegal narcotics, not medical products certified by relevant medical officials.
The answer should be insightful, clearly worded and unambiguous. The answer should show that the author deeply understands the problem. Answers that were clear and avoid wordiness are given extra marks. The answer should contain no errors of significance.
Correct answers include, but are not limited to, the healthcare costs that sick drug addicts incur on the public healthcare system in countries where such system exists or lower level of safety among non-drug users in areas where drug cartels operate.
Internalities such as deteriorating health of drug users or diminished income of drug addicts are not externalities and won't be considered. Similarly, the reasons why drugs are bad for society are not necessarily negative externalities. Also note that the question concerned drug consumption, not drug production.
b) (10 rp) Officials have the choice of punishing drug dealers (supply side), drug users (demand side), both or neither, with different levels of severity. Why might you want to target the supply side (drug dealers) as against the demand side (drug users)? Why might you want to target the demand side (drug users) as against the supply side (drug dealers)? Give at least three examples of each. Based on your understanding of the drug-related issues, what problems do you foresee with implementing both policies?
The supply-side is more elastic to punishment. Therefore, measures targeted at reducing supply could be more effective. The demand side is relatively less elastic because drugs are addictive. Measures targeted at decreasing demand could be less effective. To get a full score any discussion about relative elasticities is essential. Problems related to any measure should involve a discussion about externalities. For instance, if the demand or supply of drugs is targeted and as result "price" of drugs increase, the amount consumed is unlikely to decrease (inelastic demand) therefore addicts may do more related crimes to keep consumption levels constant. Hence, any discussion about externalities is important. The argument related to the heterogeneity of levels of addiction users (different elasticities of demand depending on the type of agent) will get additional credit. We require economic reasoning and fully fleshed out arguments behind answers. We care more about the chain of economic reasoning than the correct answer. Unspecific moral or ethical concerns such as "drugs are bad because they are illegal" will not be counted as an answer.
c) (10 rp) Design a specific public policy that you think would be best in reducing drug consumption in Chicago. Bear in mind the specific issues of drug-related problems, for example (1) the fact that drugs are addictive; 2) drug production is illegal in most countries; 3) selling drugs is often connected with violence and other types of crime.
This answer should come from a reasoning given in parts (a) and (b). There are many ways to give a reasonable answer to this question. Discussions could be about elasticities of supply/demand, eradicating externalities, costs of enforcement, tradeoffs and constraints of enforcement, probability of adjudication. If the argument involves some type of mental model, discussion of the assumptions under which the mechanism is under work will get extra points. The full score will be given if a student demonstrated knowledge of economic principles in describing the mechanisms of the argument.