The Overall Picture for Benefit-Cost Analysis for Illicit Drugs in General and for Cocaine and Heroin - Research Paper Example

An interesting debate the emerged recently is whether we ought to legalise the use of certain drugs, particularly heroin and cocaine. Surprisingly and interestingly, the prohibiting of alcohol and its eventual regulation in America have been cited as among the premises why the legalisation of the use of drugs and regulation will be better compared to prohibition. Many of the justification for regulation instead of prohibition use the approach of benefit-cost (b-c) analysis to argue why regulation is better than regulation. This work attempts to contribute in the use of benefit-cost analysis in its review whether the use of heroin and cocaine is worth legalising. Is it really more appropriate for UK to legalise heroin and cocaine based on benefit-cost analysis? In answering the question, let us from some of the older materials for insights on benefit-cost assessments. One such older material is Musgrave and Musgrave (1989). Musgrave and Musgrave’s benefit-cost assessment is founded on a notion that benefits and costs can be direct or indirect, tangible and intangible, real or pecuniary, final or intermediate, and inside or outside (1989). Inside costs or benefits, for instance, refer to costs and benefits limited to one’s area of jurisdiction. Tangible benefits and costs refer to those immediately possible to monetization while intangible benefits and costs may or may not be ultimately monetized. Although Musgrave and Musgrave (1989) had prescribed that intangible costs and benefits should be monetized so their benefit-cost value can be estimated, the authors conceded that monetization is not always possible for some of the costs and benefits. Further, Musgrave and Musgrave also conceded that even if projects may appear good or poor on the benefit-cost assessments, decision-making on a project or an initiative can be a political decision and the benefit-cost assessment is simply used as a guide and not a dogma for accepting or refusing projects or in accepting or rejecting a proposed policy. Rosen (1995) emphasised on the mathematics part of benefit-cost assessments. At the same time, he also emphasised that instead of benefit-cost assessments, cost-effectiveness may be the better approach to use for some projects or decisions involving intangibles. Stiglitz (2000) proposed a set of principles for measuring non-monetized costs and benefits. He prescribed a set of techniques for valuing time, life, and other alternative method of valuation (2000, p. 278-283). Rather than conceding on the concepts of “intangibles”, it seems that Stiglitz emphasised on monetisation end emphasised that the concept of benefit-cost analysis is “developing systematic ways of analyzing costs and benefits when market prides do not reflect social costs and benefits” (2000, p. 274). In 1998, the Risk and Policy Analysis Limited prepared a document for the European Commission elaborating on the techniques of benefit-cost assessment. The document is used for policy and proposals evaluations. We are guided by the said materials as we explore on the benefit-cost assessment of legalising the use of cocaine and heroin. As pointed out by the Matrix Knowledge Group (2007), the drug supply chain covers several continents. This is also discussed in Fox and Albertson (2010, Lecture 1 Slide 18). The drug supply chain include the dealers who bring the drugs into the UK fro overseas, the dealers who distribute the drugs at the national level or the dealers who buy the drugs in one city and sell it in another (Matrix Knowledge Group 2007, p. 17). At the local level, there are dealers who buy and sell drugs in the same region or town or town and, finally, at the retail level, there are drug dealers on the streets (Matrix Knowledge Group 2007, p. 17). The international drug network for heroin, for example, covers dealers in Turkey, Caribbean, South America, Holland, and Belgium (Matrix Knowledge Group 2007, p. 18-19). Travis (2007) showed that the cost of producing cocaine and heroin at the source was about £325 and £450 per kilo, respectively (Fox and Albertson 2010, Lecture 1 Slide 21). In contrast, however, Travis (2007) also showed that the UK street value of cocaine was £51,650 and it was £75,750 per kilo for heroin as the drugs pass hands from the source to South American dealers, to the Caribbean dealers, and eventually to the streets of the UK (Fox and Albertson 2010, Lecture 1 Slide 21). The international scope of operation of drug dealers should serve to highlight that benefit-cost analysis of cocaine and heroin trafficking should cover a wider area and not only the United Kingdom. In the language of Musgrave (1989), there are outside benefits and costs involved in the legalisation of heroin and cocaine. At the same time, note that we are not yet covering the dirty aspects usually associated with the drug trade: international murder, gangster operations, and perhaps supporting and even toppling governments. Unfortunately, this paper will not cover the matter. Table 1. Costs when heroine and cocaine are regulated versus prohibited in England and Wales Source: Transform Drug Policy Foundation 2009, p. 7 In 2007, Reuters and Stevens estimated that the cost to taxpayers of 7,981 prison sentences given to drug offences exceeded £453 million (Fox and Albertson 2010, Lecture 8 Slide 6). The Transform Drug Policy Foundation (TDPF), a group dedicated to institute “reforms” in government policies towards drug use, asserted that Table 1 reflect what government in England and Wales incur as costs when heroine and cocaine are prohibited versus when only regulated. Transform Drug Policy Foundation is a UK-registered charity foundation under registration 1100518 and a Limited Company under registration 4862177. According to Easton (2009), the TDPF admitted that the estimates in Table 1 are “back-of-the-envelope calculations” because “much of the information is simply not available”. In addition, according to Easton (2009), the conclusions involved “heroic assumptions”. In summary, Table 1 from the Transform Drug Policy Foundation (2009, p. 7) suggests that society will benefit as it moves to regulation. For instance, according to Table 1, there will be a net annual benefit of £13,943 million when there is a 50% fall in drug use when drugs use is regulated. Table 1 also says that society will benefit £10,834 million when there is no change in drug use under a regime of regulation. If drug use increased by 50% under a regime of regulation instead of prohibition, Table 1 from the Transform Drug Policy Foundation 2009 argues that society will also have a net benefit of £7,724 million. Meanwhile, Gordon et al. (2006, p. 41) revealed that the economic and social costs associated with the use of Class A drugs were about £15.4 billion in 2003/04 (also cited by the Transform Drug Policy Foundation 2009, p. 11). According to Gordon (2006, p. 41), the £15.4 billion figure in 2003/04 translates to £44,231 per year for problematic drug user with an associated confidence range of £15.3 billion and £16.1 billion. Gordon (2006, p. 41-42) identified the consequences of Class A drug use include drug-related crimes, health service use, drug-related deaths and cost of social care. In constructing a benefit-cost assessment on the illicit use of heroin and cocaine under a situation that its use is illegalised, we consider the consumers’ willingness to pay as an expression of how consumers’ value the illicit drugs for themselves. This is something not strange because costs and benefits based on demand and supply curves have been used to assess social costs and benefits. For instance, the area under the demand curve up to the price level is usually referred to as the consumer surplus. The area over the supply curve but below the price line is usually called as the producer surplus. Together the consumer and the producers’ surpluses are used to measure social impact such as the net benefit to society of a market system or of a competitive market. First, we focus on the economic and social costs. There are problem areas. Because of the costs involved in the benefit-cost assessments, we attempt to construct a benefit-cost assessment based on available data. Unfortunately, one problem with a benefit-cost assessment taking off from available studies on the matter is that many of the data do not have a good fit with each other. For instance, our economic and social costs estimates are associated with fiscal years 2003 and 2004 while our other estimates are based on the fiscal years 2004 and 2004. Nevertheless, the common year is 2004 and, based on this, we can make our estimate to applicable for year 2004. Table 2 reflects the economic and social costs associated with Class A drug used. The data comes from Gordon et al. 2006 (p. 43). Table 2. Economic and social costs of Class A drug use minus cost of drug arrests for 348,172 problematic users in 2003/04 Economic and social cost item £ in million Drug-related crime Fraud 4,866 Burglary 4,070 Robbery 2,467 Shoplifting 1,917 Health costs Inpatient care 198 Inpatient mental health 88 A&E (accidents & emergencies) 91 Community mental health 61 Primary care – GP visits 32 Neo-natal effects 3 Infectious diseases 25 Drug-related deaths 923 Social care 69 Total 14,810 Source: This writer’s modification of Gordon et al. 2006, Table 3.1 p. 43 In Gordon’s estimate, the economic and social costs involved in drug use is about £15.4 billion in which £44,231 per year is the social and economic costs associated with each drug user, implying that there were 348,172 drug users in 2004. The estimates adopted by this work differ from those adopted by Gordon et al. (2006). In particular, this work adopts Table 2 of this work and not the original table in Gordon (2006, p. 43). The item “drug arrest” in Gordon (2006, p. 43) is not included as a social cost because the cost arises only when drug use is illegal. However, when drug use is legal, the other items in the Gordon (2006, p. 43) table apply and this is captured in Table 2. Thus, Table 2 indicates that the economic and health costs for problematic drug users is about £14.81 billion divided by 348,172 drug users or about £42,536.4 per user in 2003/04 if costs are assumed to be dispersed among all users. Meanwhile, Pudney et al. (2006, p. 46) estimate that the United Kingdom in 2003/04 consumed 17.70 tonnes of street quantity of cocaine worth £973.3 million. On the other hand, the same material or Pudney et al. (2006, p. 46) estimated that the street quantity consumption of heroin is 20.11 tonnes worth £1.2067 million in 2003/2004. The estimate for the number of crack users in the United Kingdom is 192,999 as of 2004/2005 (Hay et al. 2006, p. 4). I used 192,999 as the number of users of heroin and cocaine because Hay et al. (2006, p. 24) associated crack with cocaine and there is no category for heroin use. The categories of illicit drug users adopted by Hay et al. (2006, p. 4) included “problem”, opiate, crack, and “injecting”. Probably, heroin use can be classified under the category “injecting” but because this is something not clear in Hay et al. (2006), I used adopted the figure 192,999 as the number of crack users in the United Kingdom as of 2004. To illustrate better, I reproduced Table 3 that comes from Hay et al. (2006, p. 4) pertaining to illicit drug users in the United Kingdom. Table 3. Crack users and “injector” users among illicit drug users Source: Hay et al. (2006, p. 4) From the information contained in Table 2 and Table 3 of this work, a table on costs and benefits or Table 4 next page can be constructed. Table 4. Benefit and cost of consumption of heroin and cocaine, 2004 Benefits and costs items 2004 £ in million Benefits (On the assumption that benefits are expressed by market values) Consumption of cocaine (Pudney 2006, p. 46) 973.30 Consumption of heroin (Pudney 2006, p. 46) 1,206.70 Costs Economic and social cost based associated with 192,999 crack users estimated at £42,536.4 per Class A drug user in 2003/2004 based on Gordon et al. (2006) covering costs on drug-related crimes, health use, drug-related deaths and cost of social care. The drug-related crimes, in turn, cover fraud, burglary, robbery, and shoplifting based on Gordon et al 2006, p. 43-44. 8,209.48 Cost of prison sentences at £56,759.8 per drug user based on the total cost £453 million for the sentences on 7,981 drug users based on Reuters and Stevens (2007) as cited in Fox and Albertson 2010 Lecture 8 Slide 6 Not disaggregated into cocaine and heroin users Cost of enforcement of drug laws Data not immediately available Net Benefit No more than negative 6,029.48 The figure 192,999 crack and heroin users are most likely a very low underestimate, of course. However, as we can see from the Table above, the economic and social costs associated with 192,999 crack users is already high at £8,209.48 million. In contrast, the “benefits” from heroin and crack use is £973.20 million plus £8,209.48 million or a total of £2.18 billion. This implies that net benefit from drug use is £2.18 billion minus £8.20948 billion. This is negative £6.02948 billion, representing the net economic and social costs to society of the use of cocaine and heroin. In any case, in 2004, the total expenditure valued at street value for all type of drugs in the illicit market is £5.271 billion while the economic and social costs as noted by Table 2 on page 6 of this write-up, is £14.810 (Pudney 2006, p 46; Gordon 2006, p. 43). To emphasise, note that the estimate of benefits from the illicit drugs was estimated or assumed based on the illicit consumers’ willingness to pay for the drugs. As Pudney et al. (2006, p. 46) estimated that the total size of the illicit drug market is £5.271 billion, we assume that this figure represents the benefits to the consumer or the individual. We have assumed that that the willingness to pay represents consumers’ welfare. Of course, we know that this may true under strict heroic assumptions. The heroic assumptions include: there is no public and merit good, there are no externalities involved, there are no merit goods, consumers know what is best for them, and the like. The illicit market referred to by Gordon et al. (2006, p. 46) include cannabis, amphetamines, ecstasy, cocaine, crack, and heroin. The complete listing of the illicit drugs are in Table 5. Table 5. Total expenditure for illicit drugs in 2004 Source: Pudney et al. (2006, p. 46) On the other hand, those assumed as costs based on Table 2 page 6 of this paper are the following: 1) drug-related crimes like fraud, burglary, robbery, and shoplifting; 2) cost of inpatient care because of drug related problems, accidents and emergencies or A&E, community mental health, primary care-GP visits, neo-natal health, infectious diseases, drug related deaths, and social care. Thus, as shown on Table 6 which is from Gordon (2006, p. 43), the listing of costs in Table 2 page 6 excluded costs related to drug arrests because the item will not appear as a glaring cost item when drug use becomes legalised. Table 6. Economics and social costs of Class A drugs Source: Gordon 2006 (p. 43). Note that Table 6 represents the economic and social costs associated with Class A drugs only, implying that if we cover the lower classes of illicit drugs, the economic and social costs associated with illicit drug use are likely to be much higher. In this discussion, we have used the economic and social costs associated with illicit drug use as the proxy cost estimate for the economic and social costs associated with the use of heroin or cocaine. This methodology is justified as other works on benefit-cost analyses also use the same technique, named as “transfer” of benefits or costs. With regard to a shift to regulatory regime, there seem to be no reason why drug use would decrease rather than increase if drug use were not prohibited. Thus, this work believes that drug use would probably increase rather than increase. Will the costs to society be lower with a shift to regulation? Based on Table 6, the costs of drug arrests are only £535 million and, probably, this is only the item of costs that will be reduced that will in turn reduce the negative benefit of £6.02948 billion. However, the cost reduction of £535 million given an overall social cost of £6.02948 billion will not justify regulation rather than prohibition, especially if it can be shown that drug use will increase. Overall, what is indicated in this work is that the consumer benefits from using illicit drugs, based on the consumer’s willingness to pay as the indicator of benefits, was £5.271 billion in 2004. It is easy to project the cost into 2010 by assuming that growth of the market is proportional to the population growth of the United Kingdom. We can also project the value of the demand for illicit drugs by adopting the 2.72% annual inflation figure for 1989 to 2010 as the assumption for the annual change in the prices level. The figure of 2.72% may be adopted as the average inflation rate in the UK based on the study of the group called as Trading Economics. The figure 2.72% is the average inflation rate from 1989 to 2010 (Trading Economics 2010). Of course, we could use official government estimates; but for back-of-the-envelope estimation, the use of 2.72% figure is justified and defensible. Nevertheless, it is possible of course to directly estimate the average inflation rate based on the data of the UK Office for National Statistics (2010). However, this writer believe that we need not do this for now. On the other hand, the economic and social costs from Class A illicit drugs alone amount to at least £14.810 billion based on Table 2 of page 6. Thus, using the £5.271 billion figure and the £14.810 billion economic and social costs based on the Class A illicit drugs alone, it is easy to see that net economic and social costs are no less than £ 9.53 billion. The net economic and social costs are most likely higher than £ 9.53 billion if we use Musgrave’s 1989 framework that covers inside/outside, tangible/intangible, direct/indirect and final/intermediate costs. The £ 9.53 billion is at 2004 value but it would be easy to project it to 2010 using UK’s population figures and inflation rate of 2.72%. At 2004 values, assuming the net economic and social costs of £ 9.53 billion are the only costs, the cost of enforcement will be justified if the cost of enforcing the use of illicit drugs illegal are no more than £ 9.53 billion. If enforcement costs are above this cost then there maybe a basis for considering regulation rather than an outright illegalization of illicit drugs. Similarly, the benefit from using cocaine and heroin in 2004 is £973.3 million plus £1,206.7 million, or a total of £2.18 billion, assuming that the consumers’ willingness to pay accurately indicates the value of the illicit drug to society. Given a social cost of £8.20948 billion, the implied net economic and social costs is £6.02948 billion. Shifting to regulation may reduce the cost of enforcement but it will not change the large negative value of the social and economic costs of drug use. Further, the assumption that regulation will reduce the cost of governance is still an assumption. Regulation just like prohibition has cost. We do not have proof or evidence that regulation costs will be lower than prohibition costs. In conclusion, therefore, the benefit-cost analysis used by this work shows that regulation will not change the overall picture for benefit-cost analysis for illicit drugs in general and for cocaine and heroin in particular. The costs associated with enforcement, based on available figures, are low. Even if we assume that enforcement cost will be zero, the large negative social costs associated with each user on an average basis will be maintained and, thus, will not justify regulation. In contrast, use of illicit drugs may only worsen not improve. Further, there is no evidence that the enforcement costs associated with regulation will be lower than the enforcement costs associated with prohibition. Thus, the large negative social costs associated with prohibition will likely not improve with regulation. This implies no additional economic and social benefits if regulation rather prohibition is implemented for illicit drugs. References Brand, S. and Price, R. 2000. Home office research study 217: The economic and social costs of crime. London: Home Office Research Studies. Retrieved 11 December 2010 from http://www.hm-treasury.gov.uk/green_book_guidance_crime.htm Easton, M., 2009. Could we save billions by legalising drugs? Retrieved 11 December 2010 from http://www.bbc.co.uk/blogs/thereporters/markeaston/2009/04/heroin_and_cocaine_cost_britai.html Fox, C. and Albertson, K., 2010. Lectures in Powerpoint. Manchester Metropolitan University. Godfrey, C., Eaton, G. McDougall, C. and Culyer, A. 2002. The economic and social costs of Class A drug use in England and Wales, 2000. London: Home Office Research. Retrieved 11 December 2010 from http://www.emcdda.europa.eu/attachements.cfm/att_1986_EN_economic_social_cost_England.pdf Gordon, S., 2001. Heroin: Challenge for the 21st century. New York: Caron Foundation. Gordon, L., Tinsley, L., Godfrey, C., and Parrot, S., 2006. The economic and social costs of Class A drug use in England and Wales 2003/04. In Singleton, N., Murray, R., and Tinseley, L., (eds.), Measuring different aspects of problem drug use: methodological developments. 2nd ed. Home Office Online Report 16/06: 41-45. Hay, G., Gannon, M., MacDougall, J., Millar, T., Eastwood, C., and McKeganey, Neil., 2006. Local and national estimates of the prevalence of opiate use and/or crack cocaine use (2004/2005). In Singleton, N., Murray, R., and Tinseley, L., (eds.), Measuring different aspects of problem drug use: methodological developments. 2nd ed. Home Office Online Report 16/06: 3-40. Home Office, 2005. The economic and social costs of crime against individuals and households 2003/04, Home Office Online Report 30/5. Retrieved 11 December 2010 from http://rds.homeoffice.gov.uk/rds/pdfs05/rdsolr3005.pdf Matrix Knowledge Group, 2007. The illicit drug trade in the United Kingdom. London: Home Office Online Report 20/07. Musgrave, R. and Musgrave, P., 1984. 5th ed Public finance in theory and practice. Pudney, S., Badillo, C., Bryan, M., Burton, J., Conti, G., and Lacovou, M., 2006. Estimating the size of the UK illicit drug market. In Singleton, N., Murray, R., and Tinseley, L., (eds.), Measuring different aspects of problem drug use: methodological developments. 2nd ed. Home Office Online Report 16/06: 46-85. Rosen, H., 1995. Public finance. 4th ed. Chicago: Irwin. Risk & Policy Analyst Limited, 1998. Economic evaluation of environmental policies and legislation. Prepared for the European Commission Directorate General. Safer Neighbourhood Analysis, 2007. Estimating the cost of crime in Warwickshire 2006/2007. Warwickshire: Warwickshire Observatory. Stiglitz, J., 2000. Economics of the public sector. 3rd ed. New York/London: W.W. Norton & Company. Taxpayer Alliance, 2008. The cost of crime in London. Research Note 29. London: The Taxpayer Alliance. Retrieved 11 December 2010 from http://tpa.typepad.com/home/files/the_cost_of_crime_in_london.pdf Transform Drug Policy Foundation, 2009. A comparison of the cost-effectiveness of the prohibition and regulation of drugs. Bristol: Transform Drug Policy Foundation. Trading Economics, 2010. United Kingdom inflation rate. Retrieved 12 December 2010 from http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=GBP Travis, A., 2007. From foreign fields to UK streets – the anatomy of an £8bn industry. The Guardian. Retrieved 14 December 2010 from http://www.guardian.co.uk/society/2007/nov/21/drugsandalcohol.homeaffairs UK Office for National Statistics, 2010. Retail prices index: quarterly index numbers of retail prices 1948-2010 (RPI) (RPIX). Retrieved 12 December 2010 from http://www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=7173&More=N&All=Y Read More