Illegal drugs are a lot stronger than they
used to be. For example, the average potency of marijuana, its THC content, has increased
significantly over the past 40 years. What economists call the potency effect sheds some
light on the trend. Let’s say you want to buy some weed. You can
get a dime bag of weak, low-potency marijuana for a third the price of the strong stuff.
That means that for every bag of really potent ganja you buy, you’re giving up the chance
to smoke three whole dime bags of the weak stuff. In the poetic parlance of economics,
the opportunity cost of smoking strong pot is pretty high. Since you’re on a budget,
you usually opt for the weaker weed. Now let’s consider the effects of prohibition.
Since Richard Nixon declared the war on drugs in 1973, the penalties for possessing and
dealing marijuana have gone up. The chances of getting caught may be low, but the threat
of a steep fine or jail time effectively increases the price of both high- and low-potency hash.
But notice, because of this, the cost of potent weed relative to weak weed has actually declined.
Now each bag of strong pot might only cost twice as much as weak pot. So the higher cost
is less imposing. In fact, you might think that as long as you are taking the risk you
may as well get the more potent drug. This is the potency effect in action. The larger
the penalty or the greater the chance of getting caught the smaller is the relative price difference
between strong and weak drugs. That means that laws prohibiting drugs can actually increase
the proportion of stronger drugs being used, which helps explain why potency has risen
as the war on drugs has escalated. Potency effects drive the supply side of the
market, too. As legal penalties for drug trafficking have become more severe, cartels and dealers
have had to expend more resources evading law enforcement. This means concentrated,
high-potency drugs like cocaine become even more attractive to sell since high-value amounts
are easier to transport. So dealers have an added incentive to push harder drugs. This
is why hard liquor displaced beer during alcohol prohibition in the 1920s and why cocaine use
spiked in the 1970s. Of course, not everyone can afford high-end drugs or alcohol. So just
as gangsters during alcohol prohibition would dilute whisky with water, drug dealers in
the 1970s began cutting smuggled cocaine with baking soda in order to create crack. The
resulting crack-cocaine epidemic ravaged inner city communities in the 1980s. Potency effects shape markets of all sorts.
They explain why couples with children who need to pay for a babysitter in order to enjoy
a night out tend to eat at fancier restaurants than couples without children. They also explain
why grocers in New York City respond to high transportation costs by offering top notch
produce. Potency effects are just one among many forces that make markets so complex.
Drug markets are no different. So when public policy alters the incentives people face,
it can lead to unintended and even disastrous consequences.