CWU ECON 101 - Chapter 20 The Line Between Legal and Illegal Goods (17 pages)

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Chapter 20 The Line Between Legal and Illegal Goods



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Chapter 20 The Line Between Legal and Illegal Goods

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Pages:
17
School:
Central Washigton University
Course:
Econ 101 - Economic Issues
Economic Issues Documents
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Chapter 20 The Line Between Legal and Illegal Goods McGraw Hill Irwin Copyright 2010 by The McGraw Hill Companies Inc All rights reserved Chapter Outline AN ECONOMIC MODEL OF MARKET FOR TOBACCO AND ALCOHOL DRUGS AND PROSTITUTION ARGUMENTS FOR MAKING A GOOD ILLEGAL DECRIMINALIZING DRUGS AND PROSTITUTION 20 2 You Are Here 20 3 Consumer and Producer Surplus Analysis P Supply A P C B 0 Q Demand Q t Value to the Consumer 0ACQ Consumers Pay Producers OP CQ The Variable Cost to Producers OBCQ Consumer Surplus P AC Producer Surplus BP C 20 4 Arguments for Making a Good Illegal People have limited information about the good are not capable of making a good decision about the good or the good is addictive and one time users can not learn from their mistake There are externalities effects of a transaction that hurt or help people who are not a part of that transaction involved in the production or consumption of the good The good is immoral 20 5 Preventing Bad Decisions Economists are typically reluctant to assume that people can not make good decisions Drugs tend to be an exception to this rule because they are addictive Ads appeal to children Joe Camel 20 6 Modeling Externalities Social Cost External Cost SMarginal Cost P P P D Marginal Benefit 0 Q Q The Offending Good 20 7 Examining the Externalities Tobacco accounts for approximately 1 per pack in costs incurred by taxpayers and nonsmokers Medicare Medicaid Asthma Drunk Driving accounts for 32 of the 37 000 traffic accidents that cause 41 059 deaths 27 of all violent crimes 43 for rapes are committed while the perpetrator is on drugs 36 of inmates in jail detention or prison used drugs during the month leading up to their arrest 20 8 Battling Negative Externalities While Creating Others Much of the drug violence that exists only exists because of laws criminalizing drug use If cocaine methamphetamine and marijuana were legal and inexpensive there would be less of a need for addicts to rob in order to get money to buy them there would be no drive by shootings to protect turf 20 9 A Twist on the Externalities Argument for Tobacco Cigarette smokers are more likely to die at an earlier age than they would have otherwise died in a less costly manner than they would have otherwise died e g heart attack rather than Alzheimer s Some economists estimate that this effect saves Social Security Medicare and Medicaid because they are not in nursing homes more money than the 1 per pack in estimated external costs 20 10 Using Taxes to Correct for Externalities Social Cost S tax External Cost tax SMarginal Cost P P P D Marginal Benefit 0 Q Q Tobacco Alcohol 20 11 The Tobacco Settlement and why Elasticity Matters 1998 settlement between several states and several tobacco companies 250 billion spread over 20 years Demand for tobacco products is fairly inelastic This means that the percentage change in prices will be more than the percentage reduction in smoking 20 12 A Tax on Tobacco with Inelastic Demand S tax tax SMarginal Cost P P P D Marginal Benefit 0 Q Q Tobacco Alcohol 20 13 Elasticity Estimates Elasticity of Demand for Tobacco 2 for adults 5 for children For Beer 53 Implications A dollar increase in the tax on cigarettes would reduce consumption by adults by 10 and reduce consumption by children by 25 20 14 The Importance of Elasticity for Drugs If people are addicted to a particular drug their demand for it will be inelastic Drug interdiction efforts shift the supply curve to the left This will cause prices to rise Addicts will not reduce quantity demanded much Recreational users will reduce quantity demanded more 20 15 The Impact of Decriminalizing Drugs or Prostitution P Sillegal Slegal Pillegal Plegal Dlegal Dillegal Qillegal Qlegal Q 20 16 Legalization with Taxes Applying Figure 16 5 to drugs legalization could deal with the external costs Making the tax too high would induce a black market 20 17


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