A Quantitative Study of Optimal Drug Policy in Low-Income Neighborhoods

The control of drug activity currently favors supply-side policies: drug suppliers in the U.S. face a much higher arrest rate and longer sentences than drug demanders. We construct a simple model of drug activity with search and entry frictions in labor employment and drug transactions, where the drug price and the distribution of population in a community are determined according to an occupational choice rule and a downward-sloping drug demand schedule. Through calibration analysis, we find a strong “dealer replacement effect.” As a result it is beneficial to lower the supply arrest rate and to raise the demand arrest rate from their current values. A tax-revenue neutral shift of 10% from supply-side to demand-side arrests can reduce the population of potential drug dealers by 22-25 thousand and raise aggregate local income by 380-400 million dollars at 2002 prices. (JEL Classification: D60,J60,K42,H70)