Information Failure: The UK Illicit Drug Market

The global narcotics trade is vast. From the vast quantities of marijuana distribution per capita in Rastafarian nations, to the massive opium exports of Afghanistan, drugs mean big money. In Britain, all drug use is illegal and as such all consumption takes place on the black market. However, the industry is worth over £7bn a year. The topic is in vogue with economists of late; Freakonomics discusses the economics of drugs trade. It amazes us that a drug dealer, someone we may envisage as more concerned with his next fix than market equilibrium and the clearing price, should actually, without realising it, display many classical economic traits. Oli Johnson-Munday focuses on information issues in the street-traded drugs markets.

One of the many factors that aids a drug dealer is the disparity between information on the product between supplier and consumer. From the individual types of marijuana to the very contents of a pill, the wool is entirely over our eyes, and seeing as the system is illegal, there is no trustworthy source we can rely on. Your local dealer can be lying through his teeth about the contents of your pill. And there is nothing you can do about it.

Ecstasy is a prime example. It costs “the same as a pint of beer” and is readily available. The drug induces excitement and euphoria, and claims only 20 lives a year; the same number as electric blankets do. Its positive effects however find themselves particularly in demand in nightclubs. This means that the deal is typically done (i) quickly (ii) quietly and (iii) with someone you have never met before. The cards are stacked with the dealer. This means that your ecstasy pill could be anything from nearly pure to almost entirely brick dust. The price elasticity of demand for drugs is typically very low. If X amount of drug A is now £30 instead of £20, the typical addict is not going to boycott the price raise. And in a club, the typical consumer is not going to pass on his drugs and look for another, cheaper dealer. The scope for price comparison in a club is low.

So we have essentially suggested that our consumer is going to buy the drug regardless of price. Indeed, regardless of content. There is no way to tell if your drug is a peach or a lemon until you have consumed it. This is no problem for dealers because (i) when high the typical consumer is unlikely to be complaining of over pricing and his lack of consumer surplus and (ii) refunds are generally not accepted by drug dealers (in my experience). So the asymmetry of information is clear. The drug dealer has a very easy job. He is selling a product that consumers desperately want. His product is easy to sell, and though brand loyalty may not be a suitable term, a consumer typically sticks with his local dealer. Plus his consumers have no clue what he is giving them and he doesn’t even have to really convince them that the product is a peach. With a short term product, the difference between peach ecstasy and lemon ecstasy is far less noticeable than between a peach car and a lemon car. The effects are over quickly, and the next time you buy it may be better. The quality of the drug you receive is a lottery.

Add to this the fact many dealers buy their product pre-mixed and ready to serve. Even the dealer has no real idea of what is in his product. This is a serious problem in Britain, not only for the drug dealer but also for society as a whole. The health costs of the drug industry are huge, but complications would be far less if the drugs were taken in pure form. Doctors have no clue what the drug is cut with, so if any medical issues occur, there is an asymmetry stretching from the person who cut the drug all the way to the doctor of a patient with arrhythmia. This means that doctors’ time is misspent figuring out or working around the numerous possibilities of combinations for drugs and their filler, when they could be diagnosing another patient. This adds to the inefficiency of the NHS (almost no drug addicts are on private healthcare) and can indirectly have a negative externality on those waiting to be treated. We are being cost £19 billion a year by drug used, suggests a study in York University. A hard core drug addict can do £600 of damage per week through crime. Also consider that many drugs are shared, with third parties brought into the consuming chain, and we see that the contents confusion can spread to many people.

In fact in Ibiza, many drug dealers profess to not knowing what active ingredient they are selling at all. Or if they do, the clubber certainly doesn’t. They buy whatever powder or pill is thrust their way, with no knowledge of what even the positive effects of the drug are. Again, how is a doctor supposed to treat a mystery drug related illness? The drugs market preys on the fact their consumers are (i) desperate (ii) ignorant (iii) often under the influence when purchasing and (iv) not very picky. Bizarrely it is the consumer that acts far more irrationally and foolishly than the dealer, given the information failure.

I have perhaps declined to mention even the most obvious information failure; ignorance of the ill effects of drugs. “Drugs are bad” is a popular tagline for parents and satirical comedy shows alike. However, what they actually do is less well understood. We all know smoking will get your lungs, heart, throat and mouth, but what do the individual drugs do to you that’s so bad? One has only to compare Dr. Stephenson’s drugs lecture with some of the “pro-marijuana” internet campaigns to see that opinions are divided. Whilst some would have you believe, apart from a little memory loss after excessive use, marijuana is largely acceptable, others will tell you it is a killer and corrupter of society. Many even claim alcohol is far worse a drug than marijuana. So, an information failure exists for both the ignorant and the stubborn, neither of whom acknowledge or are even aware of the supposed ill effects of drug use. The fact all consumption is done illicitly means no government regulation can take hold, and the drugs market is less easy to undermine than the smoking market. People don’t realise that even sniffing glue can destroy your brain and nose, and that drug related illnesses are real and very dangerous. Again this is a drain of the NHS, and obstructs others from being treated.

The final negative externality caused by the information failure is all drug related anti social behaviour. People do stupid things whilst under the influence. Therefore it follows that the fewer the people on the less drugs, the better for society. This means a decrease in demand for drugs benefits society. I think it is safe to say fewer drugs would be consumed in a transparent market. If the consumer knew exactly what he was snorting, he might think twice before purchasing. So the truth in the matter would cut down consumption, which would stop disorderly behaviour.

The question remains of how to address this information failure. One could say that it only serves to disincentivise consumers from purchasing drugs, which is a good thing anyway. However for the sake of drug addicts and argument, there is some merit to drug consumption. One way of addressing this is simply to legalise drugs; this allows an independent “kite-mark” style firm to quality control products, so we know what we are purchasing. More campaigning can happen to promote awareness of the effects of drugs, and heavy excises can be placed to control consumption and add to Government revenue. However, it is worth noting that binge drinking, costing us “£20bn a year” in negative externalities, has tried awareness campaigns and heavy taxation, but to little avail. It seems that with addictive and in vogue items, people are willing to pay more to have them. With marijuana at least, a solution has presented itself. People are now growing their own marijuana at levels never seen before, from a single plant for personal use, to an entire warehouse for wholesale. The barriers to entry are low, save for the need for a lot of lighting and the will to break the law. This way you can be narcotically self sufficient. For imported drugs however, it seems legalisation is the only plausible solution, unless you work on a personal level with the dealer. The information gap is here to stay.