Law of Demand Watch

*In his political opinions, the Literatus is atypical of his caste. To put it less delicately, he's a right-wing bastard sickened unto death with the leftist pieties usual among Canadian writer types. But he does share a support for across-the-board drug legalization. And in a recent missive to the Pithlord, he claimed that legalization would do wonders for the social problems of the Downtown Eastside.

I don't know whether the literatus believes that drug legalization would reduce addiction, but I have heard it said -- sometimes by libertarians one would otherwise suspect had a knowledge of economics. Whatever the merits of legalization, this seems unlikely, and it does the legalization cause no good to pretend otherwise.

The basic principle of economics is the law of demand. It holds that with few exceptions, the number of willing purchasers of any good or service will increase as the price decreases. Price should include not only the money given to the seller but all the other costs that the purchaser has to undergo to make the deal. Indeed, costs other than the receipts to the seller will be the only kind of costs that unambiguously reduce the number of sales, since an increase in the amount of money changing hands, while reducing quantities demanded, will also increase quantities supplied.

It follows that a tax on a transaction will almost always reduce the incidence of that transaction. Legalization people sometimes point to this fact and say that taxes on drugs will bring about reductions in drug use, just as they have for smoking. Except that the effect of a tax diminishes as the tax increases because above a certain point they just create a demand for black markets. That's what happened with respect to cigarette taxes in the early 90s, helping to set up the Russian mob in this country (thanks Bob Rae!). A legal ban is just the equivalent of an infinite tax, and lower taxes will at best leave the number of transactions unchanged. So legalization is not going to reduce the use of drugs, and will in all probability increase it.

That doesn't mean that criminalization is the best policy. It could be that the costs of enforcing criminalization exceed the benefits of reduced use. But legalization advocates rarely seem to argue this way.

*On the other side of the political spectrum (although once again enabled by libertarians) are those who say that increased gas prices will never lead to reductions in the use of cars or the choice of more fuel efficient ones. I recall hearing Margaret Wente play this tune on CBC AM recently in her role as eternal right-wing contrarian. Zero reduction is only possible if demand is completely inelastic. Gas purchases probably are highly inelastic in the short run, because it is difficult to change cars or driving patterns. But in the medium run, people do reduce their use. Quick Googling shows that the demand elasticity for gasoline is -0.26 in the short run (under a year) and -0.64 in the longer term.