Jonathan P. Caulkins and Michael A. C. Lee make a unique economic argument for keeping drugs illegal. They argue that, since drug prices appear to be more elastic than before, the increasing cost of production due to the ban on drugs does indeed lower drug usage. Because of this, the authors also argue that the main defense of pro-legalization advocates, to legalize and tax, would have little effect, since the tremendous decrease in price as a result of legalization would more than offset the incremental increase in price as a result of excise taxes.
The evidence suggests that only by legalizing the expensive drugs — cocaine and crack, heroin, and meth — could policymakers bring about the social and economic benefits proponents claim, as legalizing marijuana alone would not alter the basic character of the drug problem. But legalizing those more expensive drugs would also likely yield enormous drawbacks.
To understand the consequences of legalization, it is essential to start with a crucial factor too often ignored: prohibition’s effects on production costs.
Some legalization advocates suggest that the likely price collapses could be counteracted, and the subsequent increases in drug use avoided, by the imposition of excise taxes. (The prospect of revenues from such taxes is also a deal-sweetener used to attract political support for legalization.) What these advocates neglect, however, is the fact that taxes capable of achieving these aims would be exceedingly difficult to collect.
The reasons why are straightforward. The first is a matter of amount: As we have seen, the price collapse that would be induced by legalization is enormous. Any tax that aimed to offset it, even in part, would therefore have to be staggeringly high.