The war on drugs is motivated by concern that use of illegal drugs is not a victimless crime, but imposes externalities on others so that the social costs of drug use exceed private costs. Antidrug enforcement means that both suppliers and buyers face a risk of being caught and punished. This raises the marginal cost for suppliers, and also raises the effective price of drugs faced by buyers (the cash price plus the expected punishment). Assume that the market for illegal drugs is competitive with many buyers and sellers.

(a) Consider a proposal to focus additional enforcement efforts on suppliers such as by increasing border interdictions that catch a higher fraction of illegal shipments. Illustrate the effect of this policy on the market for illegal drugs using a supply and demand diagram. What effect will this have on the effective (cash plus expected punishment) price of drugs?

(b) Consider a proposal to focus additional enforcement efforts on buyers such as by hiring more undercover police. Illustrate the effect of this policy on the market for illegal drugs using a supply and demand diagram. What effect will this policy have on the effective price of drugs?

Now assume that users tend to fall into two categories: casual (occasional) users and addicts. Suppose that casual users tend to be wealthier, and therefore attach a much greater financial disutility to jail time. Addicts, on the other hand, are less wealthy but also less responsive to price changes.

c) Would the crackdown on suppliers impact the effective price faced by casual users more, less, or the same as the effective price faced by addicts?

(d) Would the crackdown on buyers impact the effective price of drugs faced by casual users more, less, or the same as the effective price faced by addicts?