Let's suppose that there were two types of demanders in the drug market: 6 casual users with a buyer value of $15 and 6 addicted demanders with a buyer value of $30. Since addicts experienced a $20 loss if they did not purchase drugs, an addicted demander is willing to pay up to $50 for a unit of drugs.
Suppliers have a seller cost of $10 per unit sold. Each supplier may sell 0, 1, or 2 units of drugs. Suppose there are 12 suppliers in the market.
|Equilibrium in the first session, when drugs are legal, occurs at a price of $10. At that price, all 6 casual users and all 6 addicted demanders purchase drugs.|
In session 2, the police intercept half of all transactions and when they intercept a transaction they destroy the goods and fine the supplier $5.
How is the supply curve affected?
|For each unit she is able to sell, a supplier will have to supply 2 units and pay a fine. Therefore, the cost of making a successful sale is $25 per unit. The lowest price a supplier is willing to accept is $25. The quantity of drugs that reaches the demanders is just one per supplier. So, the supply curve shifts upward to the left. The equilibrium price rises to $25. At that price, only the addicted demanders purchase drugs.|
If police only punish suppliers, then demanders willingness to pay is unaffected and the demand curve is unchanged.
Drug policy can be used to affect the demand curve by either reducing demander's willingness to pay or by punishing drug buyers and, therby, increasing the cost of buying drugs above the price paid to suppliers. Information on the dangers of drugs and treatment for addicts might reduce the willingness to pay. This shifts down the demand curve for drugs. Punishing demanders with arrest and imprisonment makes the cost of drugs to a buyer higher than the price he pays the seller. Again, the demand curve shifts down.