Economics of Alcohol Abuse Econcs of Drugs

Economics of Alcohol Abuse

Econcs Of Drugs & Alcohol

How an Economist Might Approach Alcohol Abuse

One answer would be to raise price by decree. Holding all other factors the same, this artificial price increase would initially reduce quantity consumed, but there would still be demand that went unfulfilled, which implies foregone profit at the new lower quantity and higher shelf price. Were supply restricted, say through a fixed number of licenses, this triangle would represent profits producers would want to capture but could not under the artificially high price. Were the price rise caused by say input costs, in the long run producers who could achieve economies of scale would increase production, so price would fall back to the original at higher quantity (Chen, 2007, p. 1), but this would be impossible were supply artificially limited, and if the profits were taxed away there would be no incentive to increase supply. In the case of a tax, the result would be a transfer from the producers to the state with unfulfilled consumer demand at a new artificial lower quantity and higher price, which would normally be a deadweight loss to society. If there were social costs to alcohol abuse, the artificial restriction of demand would offset some of that loss and if the tax went to the same general fund it would also offset that cost.

But this story above assumes all consumers can quit. Were alcohol addictive, the addicts would consume at any price regardless of supply after all the casual consumers had been priced out. The market solution might just reduce the personal income of the lowest-earning abusers, cause them to commit crime, or if they had to work more to support the higher price of their habit, this assumes there was work to be had. One way to deal with this element would be to offer difficult rehabilitation in exchange for controlled dosages for those who couldn't afford the new higher cost. As more alcoholics gave up, total social cost from enforcement and damages would fall, workforce productivity might increase, and any remaining program costs could perhaps be shifted onto offenders who could afford to pay. Price controls and taxation can reduce supply and quantity supplied, but the ultimate long run solution is to reduce demand for products that generate social costs. This is not possible in some cases, say for lifesaving drugs, where consumers will do anything to obtain, or society feels refusal is not appropriate either. This analysis made and tested assumptions with all others held constant, then tested those assumptions, considered the effects at the margin and ways incentives could encourage behavior as per the four elements of economic thinking (Heyne, 1998, n. p.)

Prescription Drugs Affect the Demand and Supply of All Other Products and Services

Research cost spent on developing new drugs could be applied to other production, as could the shelf space, advertising, packaging and shipping expense, and the chemicals in prescription drugs. Therefore prescription drugs increase the demand for all other products that compete for those scarce resources; in the widest sense, with every single other product. Such competition for resources restricts the supply and thus raises the price of all other goods that could be made with the time, energy and materials required to bring the drug to market.

On the other hand this research, sales, promotion, distribution and the effects of the drugs may increase demand for other products in some ways and reduce them in others. If medical students pay for college to be able to prescribe the drug, the instructor has a job, as do the researchers, truckdrivers, sales reps and the doctors who deliver it. If the drug keeps people alive longer, they may demand more goods and services than before the drug, which would pull supply higher (in theory) over the long run, or raise prices in the short run, which means more revenue for producers. This may or may not be more than before the pill was invented, if the pill cured the disease at a much lower cost. If someone invented a $1 pill that cured cancer, the resulting fall in demand for high-priced intensive care would either devastate the medical industry, or those producers could switch to treating other diseases.

Price Elasticity is an Important Consideration

If we imagine a straight line parallel to but above the X-axis on the Cartesian plane, and then imagine an upward-sloping supply curve, and then call the horizontal line "demand" where Y = price, then what this indicates is that any quantity produced will be demanded at the price where the horizontal demand curve intersects the Y axis. This is called 'infinitely elastic demand,' because at or below the threshold price, consumers will buy every unit. Above the price, they will buy none. Now imagine that line rotated until it intersects the X and is parallel to the Y axis instead. This is called "infinitely inelastic," because no matter what the price, consumers will only demand one set quantity. The change in quantity is "all of it or nothing" in the first case, and in the second case, "only this much, regardless of cost." This is because the elasticity of demand and supply curves describes the change in quantity demanded per unit change in price. If the change in quantity demanded is the same regardless of price change, then a huge change in price, as indicated by the intersection of the demand and supply curves, changes absolutely zero quantity demanded. In the other extreme, infinitely elastic case, no matter where the supply curve intersects demand, that is how many units will clear, given no price higher. Halfway between these two extremes is a demand horizon with a slope of -1 i.e. elasticity of 1, "unit elastic," where a 1% decrease in price leads directly leads to an exactly corresponding 1% increase in demand at the new lower price. The difference arises in how much we have to move one curve in order to achieve a change in the other variable. The same applies to supply, where an inelastic supply curve means price will change less for large shifts in quantity demanded, but a small change in quantity demanded will cause a large shift in price for a highly elastic supply / it will take a large increase in price to reduce demand by very much. An example of a horizontal demand curve would be a risk-free, zero-coupon bond that traded up to but not over face value, because investors demand a liquidity premium for not holding cash. An example of highly price-inelastic supply would be electricity, where the plant is so expensive and produces so much it takes a large shift in demand to justify building new capacity.