The sale of rhinoceros horns is not prohibited because of concern about the wicked pleasures of aphrodisiac imbibers, but because the supply activity is bad for rhinoceroses. Similarly, the Australian reason for restricting the exportation of cockatoos to the United States is not because having a cockatoo is bad for you. Indeed it is legal for Australians to have cockatoos as pets. The motive for the restriction is simply to protect the wild populations from being overexploited. In the case of other commodities, it appears that society has no particular interest in restricting the supply activities but wishes to restrict consumption. A good example is illicit drugs. The growing of marijuana, for example, is a simple pastoral activity, which in itself is no more harmful than growing sweet corn or brussels sprouts. It is the consumption of marijuana to which society objects.
Suppose that there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers. But whenever the marijuana authorities find marijuana growing or in the hands of dealers, they seize the marijuana and fine the supplier. Suppose that the probability that marijuana is seized is .3 and that the fine if you are caught is $10 per ounce.
(a) If the “street price” is $p per ounce, what is the expected revenue net of fines to a dealer from selling an ounce of marijuana? _______. What then would be the equilibrium price of marijuana? _______.
(b) Suppose that the demand function for marijuana has the equation Q = A − Bp. If all confiscated marijuana is destroyed, what will be the equilibrium consumption of marijuana? _______. Suppose that confiscated marijuana is not destroyed but sold on the open market. What will be the equilibrium consumption of marijuana? _______.
(c) The price of marijuana will (increase, decrease, stay the same) ________.
(d) If there were increasing rather than constant marginal cost in marijuana production, do you think that consumption would be greater if confiscated marijuana were sold than if it were destroyed? Explain. ________.