Supply and Demand in the Cocaine Industry

The Wall Street Journal's Informed Reader has picked up an interesting article on cocaine in the Atlantic (behind a subscription firewall here). Apparently the street price of a gram of cocaine is now down to $20, down from $200 in the late 1990s and $600 in the early 1980s. And yet, despite some of the steepest price drops the world has ever seen, demand for the drug is no better than steady.

There are two supply-and-demand questions here. The first is the one posed by the Atlantic's Ken Dermota: if supply is falling and demand is steady, how can the price of cocaine be falling? But the second one is also interesting: if the price is falling so dramatically, how come demand isn't going through the roof?

Ex post, I'm sure it's possible to come up with some story about how people just aren't that into cocaine any more, or they're more conscious of the dangers of cocaine addiction, or things along those lines. And I'm sure that there are interesting stories to be told about the rise and fall of the crack epidemic, as well. But the price of cocaine seems to have been falling quite steadily and quite regardless of the level of demand from crack addicts, and the other factors don't on their face seem strong enough to repeal basic laws of economics.

There's a large faction of economists who love to say that raising the minimum wage must also raise unemployment, because of the way that supply and demand curves work. I wonder what they would have to say about the cocaine situation.

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