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Suppose the price elasticity of demand for cocaine is -0.5. What will happen to the equilibrium price, quantity, and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine?
Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine. As a result of the reduction in supply the price of cocaine increases by 25 percent. If the price elasticity of demand is -0.5, what is likely to happen to the incentive to sell cocaine?
Based on your answers, explain why one approach might be preferred over the other.
The government’s efforts to reduce demand would cause the equilibrium price of cocaine to increase, while the quantity and total revenue from cocaine sales would decrease. Since the price elasticity of demand is -0.5, a 25 percent increase in the price will lead to an even greater decrease in the quantity demanded. This would reduce incentives for sellers as they would earn less money than before due to lower overall sales.
On the other hand, if the government continues its focus on reducing supply, then prices will be forced up by the decreased availability of cocaine and fewer incentives are needed for buyers. This might be preferred over reducing demand because it generally leads to a larger reduction in cocaine-related crimes and harms associated with drug use since there is less access to illegal drugs on the market. Additionally, focusing on supply also makes it more difficult for distributors and manufacturers of illicit drugs since their activities become expensive or impossible due to increased law enforcement pressure or lack of resources/supplies.