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CWU ECON 101 - Chapter 20 The Line Between Legal and Illegal Goods

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Chapter 20 The Line Between Legal and Illegal GoodsChapter OutlineYou Are HereConsumer and Producer Surplus AnalysisArguments for Making a Good IllegalPreventing Bad DecisionsModeling ExternalitiesExamining the ExternalitiesBattling Negative Externalities While Creating OthersA Twist on the Externalities Argument for TobaccoUsing Taxes to Correct for ExternalitiesThe Tobacco Settlement and why Elasticity MattersA Tax on Tobacco with Inelastic DemandElasticity EstimatesThe Importance of Elasticity for DrugsThe Impact of Decriminalizing Drugs or ProstitutionLegalization with TaxesChapter 20The Line Between Legal and Illegal GoodsCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin20-2Chapter Outline•AN ECONOMIC MODEL OF MARKET FOR TOBACCO AND ALCOHOL DRUGS AND PROSTITUTION•ARGUMENTS FOR MAKING A GOOD ILLEGAL•DECRIMINALIZING DRUGS AND PROSTITUTION20-3You Are Here20-4Consumer and Producer Surplus AnalysisQ/tPDemandSupplyAP*BC0 Q*•Value to the Consumer: •0ACQ*•Consumers Pay Producers: •OP*CQ*•The Variable Cost to Producers: •OBCQ*•Consumer Surplus: •P*AC•Producer Surplus: •BP*C20-5Arguments 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.20-6Preventing 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 Camel20-7Modeling ExternalitiesSMarginal CostD(Marginal Benefit)Q*P*PThe Offending Good0Social CostExternal CostQ’P’20-8Examining 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.20-9Battling 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.20-10A 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.20-11Using Taxes to Correct for ExternalitiesSMarginal CostD(Marginal Benefit)Q*P*PTobacco/Alcohol0Social Cost=S+taxExternal Cost=taxQ’P’20-12The 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.20-13A Tax on Tobacco with Inelastic DemandSMarginal CostD(Marginal Benefit)Q*P*PTobacco/Alcohol0S+taxtaxQ’P’20-14Elasticity 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%.20-15The 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 more20-16The Impact of Decriminalizing Drugs or ProstitutionSillegalDillegalDlegalSlegalQlegalPlegalQillegalPillegalPQ20-17Legalization with Taxes•Applying Figure 16.5 to drugs, legalization could deal with the external costs.•Making the tax too high would induce a black


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CWU ECON 101 - Chapter 20 The Line Between Legal and Illegal Goods

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