The Price of Illicit Drugs: 1981 through the - The White House

emerging that higher prices can result in lower experimentation by school-aged children, with long-term
consequences for future drug use. 6 Apparently a successful supply-based program can complement a
comprehensive demand-based program.
The findings described above probably seem sensible to most people. If public officials impede the
production and delivery of drugs, and increase the risk of transacting illicit substances, then prices should
increase as dealers attempt to recoup their costs and compensate for risk. Users should respond to those
higher prices the same way they do to the price of tobacco and alcohol – they will use less. But the
pressing question is the magnitude of the effect that public interventions have on prices and that those
prices have on consumption. Estimating that effect is difficult for a number of reasons, including the
problem of getting reliable estimates of drug prices.
By comparison, estimating the retail price of hamburger is simple. Go to several grocery stores and
observe prices for a standard amount (say one pound) and quality (say 95 percent lean). There will be
some variation from store to store, of course, but competition will keep the prices within a narrow range.
Illicit substances are different. Nominal prices seem to stay about the same over time and from place to
place. For example, $10 and $20 bags of heroin have been typical retail transaction for years. The quality
of those purchases, however, varies greatly from place to place, from time to time, and even from customer
to customer. Decreases in the purity of their product, and hence increases in its price per pure gram, are the
way that drug dealers charge higher prices. As a practical matter, then, useful price series must be
expressed in such metrics as “price per pure gram” and “purity of a standard transaction amount” rather
than nominal transaction amounts. 7
Unfortunately, for those concerned with public policy, that quality variation is not directly observable. A
bag of 5 percent pure heroin looks no different than a bag of 50 percent pure heroin. Some buyers may be
sufficiently experienced to judge small changes in quality, but as a practical matter the quality of heroin
and other drugs must be judged by laboratory analysis.
6 Rhodes, W., Johnston, P., Han, S., McMullen, Q. and Hozik, L. “Illicit Drugs: Price Elasticity of Demand and
Supply,” report submitted to the National Institute of Justice by Abt Associates, February 17, 2000.
7 The value of the dollar has generally decreased over time due to inflation. It seems reasonable to adjust estimated
drug prices to account for inflation, but the size of that adjustment is arguable. We have used the consumer price
index, but many hardcore drug users have an atypical market basket that is dominated by drug consumption.
Some alternative price index may be more appropriate for them.
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