Question:
Use a demand and supply graph to show that Ted Koppel’s proposed explanation of a decrease in drug prices is incorrect. (Related to Application 6)
Transcribed Image Text:
Application 6
WHY LOWER DRUG PRICES?
APPLYING THE CONCEPTS # 6: What explains a decrease in price?
Ted Koppel, host of the ABC news program Nightline, once
said, "Do you know what's happened to the price of drugs in
the United States? The price of cocaine, way down, the price
of marijuana, way down. You don't have to be an expert in eco-
nomics to know that when the price goes down, it means more
stuff is coming in. That's supply and demand." According to
Koppel, the price of drugs dropped because the government's
efforts to control the supply of illegal drugs had failed. In other
words, the lower price resulted from an increase in supply.
Is koppel's economic detective work sound? In Table 4.5,
Koppel's explanation of lower prices is the third case-increase
in supply. This is the correct explanation only if a decrease in
price is accompanied by an increase in the equilibrium quantity.
But according to the U.S. Department of Justice, the quantity
of drugs consumed actually decreased during the period of
dropping prices. Therefore, the correct explanation of lower
prices is the second case-decrease in demand. In this case,
lower demand-not a failure of the government's drug policy-
was responsible for the decrease in drug prices. Related to
Exercises 6.5 and 6.13.
SOURCES: Kenneth R. Clark, "Legalize Drugs. A Case for Koppel," Chicago
Tribune, August 30, 1988, sec. 5, p. 8; U.S. Department of Justice, "Drugs, Crime,
and the Justice System" (Washington, DC: U.S. Government Printing Office, 1992),
p. 30.
