Increased/Deadly Potency in Heroin Markets due to Fentanyl

The Boston Globe put out a piece yesterday entitled “DEA details path of deadly heroin blend to N.E.: Potent painkiller fentanyl believed added in Mexico.”

This headline could not be more representative of the problems Dr. Mark Thornton mentions in his book The Economics of Prohibition. To summarize Thornton:

“Prohibition statutes generally consist of three parts. First, to be illegal, products must contain a minimum amount of a certain drug… Second, penalties are generally levied on the basis of weight… Finally, penalties are established for production, distribution, and possession. The prohibition statutes consistently define the product in terms of minimum potency (without constraining the maximum). Also, the heavier the shipment, the more severe the penalty.” (Thornton, 1991, p. 96).

Therefore distributors and traffickers (the Mexican drug cartels moving the heroin that originated in Colombia to the U.S.) have every incentive, in order to avoid detection but keep revenue high, to increase the potency of the drugs they are moving such that they can move the same value of heroin but in a smaller quantity. This is what we see currently happening with Mexican cartels mixing heroin with fentanyl.

From the Boston Globe article, “Ruthless drug organizations are including fentanyl, an opioid 30 times more powerful than heroin, to provide a new, extreme high for addicts who often are unaware the synthetic painkiller has been added.” The final point of this quote is critical. There is a huge information asymmetry between traffickers and the end consumer. Because drugs often change many hands before they reach the final user, quality standards are hard to track and verify. Furthermore, end users have minimal recourse to deal with issues of product contamination or inferior quality. They cannot sue their dealer. They cannot take anyone to court. Therefore, as a direct result of the illegal status of heroin trade, consumers have very few rights and outlets to verify that their product contains what they were expecting. While many people want to point out the Mexican cartels as the villains (and they may very well be on other margins like the relentless killing that is going on as we speak) in this scenario, these cartels are only responding to the incentives set in front of them. If we want to take issue with anyone, we need to look at the laws that have been in place since 1924, and even back to 1914. Since then, these laws have only gotten more restrictive and deadlier to everyone involved in illicit drug trade.

Uruguayan government: “monopoly” on pot

Last week, Uruguay’s government passed legislation to legalize marijuana. While the government will not be growing any cannabis plants (they are leaving that to private cultivators and farmers), the state will be playing a major role in the market… by fixing the price for marijuana at $1 per gram.

The rationale behind this production legalization and price fixing is to limit the amount of marijuana being trafficked into the country (mainly from Paraguay). As many of you may know, the narcotics trafficking business in Latin America is wrought with intense violence and organized crime. By fixing the price at $1 a gram, government officials believe this initiative will drive these traffickers out of business (at least in Uruguay). However, as all government interventions go, we need to ask ourselves, what are the possible unintended consequences lurking around the corner?

The issue I have is not with the legalization of marijuana, but with the price-fixing component of the legislation. Interventions into the market distort information (price) signals, forcing entrepreneurs to work off of incorrect information for their profit and loss calculations. Given that the drug market is already entrenched in these distortions, is this price-fixing component of the legislation a step in the right direction, or does it just complicate matters further?

The incentive structure, given the fixed price, is not the same as it would be in a free market. Any incentive that could have pushed these traffickers to move away from violence if it resulted in greater profits has been removed. Perhaps these violent traffickers will leave the marijuana business in Uruguay, but will they relocate efforts to other countries, or perhaps begin focusing on different illegal narcotics to traffic into Uruguay? If these new freedoms being granted to Uruguayans are coming at the cost of increased violence in other countries as a result of this price-fixing component, should we consider this a success?

Breaking Bad Policy of Drug Prohibition (spoiler alert).

I would argue that the only positive thing that has come out of the War on Drugs is awesome TV. From The Wire to Breaking Bad, illegal drug markets have brought us entertaining and groundbreaking television, but at what cost? As Breaking Bad has sadly come to an end, I would like to look at how things might have been different for Walter White and friends in a world without the drug prohibition. While I loved the adrenaline rush I experienced watching every episode, the violence and death highlighted in the show is indicative of a major problem.

Let’s assume for a moment that prior to the creation of the show, the U.S. government ended drug prohibition. Unlike what many paternalistic politicians would like you to think, the world would not descend into utter chaos or come to a grinding halt. How would this effect the show? Well, first and foremost, there would be no DEA (high five, hell yes)… thus Walter would have never gone on the ride-along that ultimately led him to a reunion with Jesse Pinkman. It is also likely that Walt would never consider drug manufacturing as a means to solving his money problem for cancer treatment. Why do I say this? The profit margin of the caliber in the show would not likely exist in a world outside of drug prohibition. In the illegal markets, the cost and risk associated with engaging in illegal activity and possibly getting caught serve as very costly barriers to entry. There are also sizable costs associated with self-regulation in illegal markets because the court system is not an available outlet for settling disputes. This drastically limits the number of producers willing to participate in the market.

Consider the circumstances surrounding the murder of Combo (Jesse’s friend that was shot by that young kid for selling on the wrong turf). There was an implicit contract that highlighted who could sell where, and at the urging of Jesse’s quest to build his empire, Combo started selling in neighborhoods that “belonged” to a rival drug gang. In illegal markets, how do you set an example that your turf cannot be taken? You resort to violence to make an example of what will happen to anyone who tries to disregard your jurisdiction. Furthermore, the legal recourse in a murder associated with other illegal activity is complicated. Jesse could not simply go to the police and explain that Combo’s death was a result of a drug turf dispute without implicating himself in a slue of crimes. However, if the drug prohibition component was absent from this equation, the rival gang would have not have used murder in order to solve the problem. For example, do you hear of a CVS owner shooting a new-to-the-area Walgreen’s owner for opening a new location? But even in the unlikely event that this happens, because there is not any illegal activity taking place outside of the act of murder, all parties involved can provide the necessary authorities (ideally private policing companies… but that is a blog post for a later time) the information needed to bring the murderers to justice without fear of being punished. This would allow Jesse to use the court system to punish the rival drug gang members rather attempting to murder them himself (and successfully killing them thanks to Walt’s fatherly instinct and his Pontiac Aztek).

Absent that extensive (but not exhaustive) list of costs brought on by the nature of illegal markets, many potential drug producers can move into enter the market. This forces the price of the goods sold to decrease, lessening the profits available to each drug producer. Thus, the sizable profit margin that led Walt down the road of methamphetamine production would not be as high in a world with legal production (at least on the scale of production consisting of Walt and Jesse in a trailer… However, if he started his own pharmaceutical company specializing in meth, that would be a different story… one that I hope to elaborate on soon, highlighting how ending the War on Drugs is only part of the battle).

Another situation that could have been avoided was the virtual enslavement of Walt and Jesse by Gus Fring. Once again, the hold that Gus had over Walt and Jesse (knowledge and proof of their involvement in countless felony-crimes) would be a non-issue outside of a prohibition state. The same could be said about the situation when Tuco initially refused to pay Jesse for his product. Breaking Bad is full of the issues associated with the limited ability for individuals to establish, execute, and enforce contracts. With substantially better defined property rights and access to a court system to settle disputes without fear of being punished, drug producers would not need to engage in violence to settle these disputes.

So where does this leave us? Well, it would leave us with a rather boring TV show where the most exhilarating dilemma is which daycare Skyler & Walt will choose for baby Holly. No more train heists, no more wheelchair bombs, and no more car trunk machine guns. Though I do love my fellow Richmonder’s directorial and writing brilliance (Vince Gilligan, you are the man), I would be willing to trade it any day for a freer state devoid of the devastating effects inflicted on all of our lives (directly or indirectly) by the War on Drugs.