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A false reading of legalization’s effects

July 23, 2013
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Over at the “Reality-Based Community,” Keith Humphreys has a post: How Legalization Can Expand a Black Market

In it, he claims: “new research from the London School of Economics shows that legalizing prostitution increases, rather than decreases, human trafficking.”

This, he feels, gives him the authority to proclaim:

But in the meantime, wise heads in the policy world will not take it as a given that legalizing something will necessarily shrink the black market.

Wrong.

First of all, the commenters over there have already destroyed the argument by noting at least two major flaws: the lack of accepted global standards regarding the definition of human trafficking; and the fact that the study doesn’t explore methods of regulation.

But let’s go to the study itself.

If Keith had bothered to read the entire article, he would have found the authors note that the study methodology:

…cannot provide a conclusion as to whether legalizing prostitution would result in increased trafficking after legalization.

In order to come up with the conclusions that Keith loved, they had to turn to anecdotal information.

There may be some useful information in the data gathered by this study — but there certainly isn’t any in the way of supported evidence regarding regulated legalization of prostitution and the effect on human trafficking.

Keith makes another bone-headed statement in his post:

…demand for prostitution, gambling, drugs and the like is highly elastic. When the demand-suppressing effect of illegality is removed, demand can increase, sometimes dramatically.

Yes, it’s true that when illegality is removed, demand can increase, sometimes dramatically. However, that doesn’t have anything to do with elasticity.

Elasticity is an economic term that measures how much one economic variable affects others (not the effects of something like legalization). People like Humphreys often claim that demand for drugs is highly elastic because it supports their view that if we raise prices we can control use. And they use as evidence articles that show an increase in prices reducing overall use (which is not evidence of whether a commodity is relatively inelastic or relatively elastic, but simply a matter of whether it is elastic at all — which pretty much everything is).

Here’s a brief description of elasticity:

Assume the following:

  • If I sell a prime rib dinner at $15, 100 people will buy it.
  • If I raise the price to $20, only 60 people will buy it.

This is clearly a situation of relative elasticity. When I raise the price, not only did the numbers buying go down, but they went down so significantly that I go from bringing in $1,500 to only bringing in $1,200.
Instead assume:

  • If I sell a lobster dinner at $15, 100 people will buy it.
  • If I raise the price to $20, only 90 people will buy it.

This is a situation of relative inelasticity. Sure, the total number of people buying it went down, but now instead of bringing in $1,500, I am actually bringing in $1,800! Most people were willing to pay the increased price, and so I can benefit from raising the price. (That’ll change, of course, if a restaurant down the street offers lobster at $18).

With illegal drugs (and gambling and prostitution), as long as competition isn’t there to drive the price down, or you haven’t maxed out the PED (price elasticity of demand), suppliers can raise the price and people will pay it. Sure, a few will drop out, but enough will pay it to make the suppliers realize an overall increase in revenue, making them stinking rich. They will continue to raise that price until it reaches that maximum.

That is price elasticity of demand in its basic form. (Note, there is also price elasticity of supply as well as other economic functions.)

The junk economics used by Humphreys doesn’t help add any reality to the community.

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Pete Guither is the editor of drugwarrant.com

BAD TIDINGS FOR EAST HAWAII

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