Cocainenomics: Supply and Demand

Alex Arenas HB-

When I tell people that I am Colombian, they tend to look at me wide-eyed with thoughts of unruly drug cartels and merciless kidnappings.Since the 1970’s, Colombia has been home to some of the most violent and sophisticated drug trafficking organizations to ever exist.  In the last thirty years, the drug industry in Colombia has blossomed into an enormous multi-billion dollar cocaine empire. At its height, under the power of Pablo Escobar, the Medillín Cartel earned as much as 4 billion dollars a year.[2] Unlike many businesses where price and supply are controlled,it pumped an endless supply of cocaine into the market and let the market set the price.[1] Although the drug industry under Pablo Escobar carried many negative externalities, it was a successful industry at the market level, taking into account the roles of supply, demand, and incentives as seen in Chapter one of Naked Economics.

On Wall Street in the 1970’s, the rise of the stressful trading floor coincided with the rise of the demand for cocaine. When the demand for the addictive drug exploded, Colombians were in the perfect position to feed American’s cocaine addiction. Because the demand for cocaine was so high in the United States, A kilo of cocaine might cost $1,000 to refine and up to $4,000 to smuggle to Miami, where Escobar’s agents could sell it for $50,000 to $70,000 in the mid-1980s.[1] The cartel had market power, meaning that it had the ability to raise and maintain a price above the level that would prevail under a regular market, displaying how companies attempt to pick a price that leads to the quantity of sales that earn the company the most money.[3] Illegal drug markets are characterized by complex features, such as addiction. According to the demand curve, when prices are low, demand is supposed to increase, and when prices are high, demand is supposed to decrease. For the demand curve in the case of addiction, higher prices may not reduce demand in the short run since cocaine is a necessity for addicts. Furthermore, the incentive for addicts to buy cocaine at higher prices goes to show that the demand of a good may not depend on the price as long as the incentives fueling the demand for that good remain high. This is the reason why the drug market in Colombia was able to reap immense profits.

Although the Colombian drug market under Pablo Escobar came with many negative externalities, such as danger to public health and safety, it was a brilliant business. The business used prices to gauge what consumers want,[3] enabling the Cartel to make vast profits in the 1970’s and 80’s.

[1]”Cocainenomics – The Wall Street Journal.” Accessed October 20, 2016. http://www.wsj.com/ad/cocainenomics/.

[2]Bowley, Jenna. “Robin Hood or Villain: The Social Constructions of Pablo Escobar” Accessed October 20, 2016. http://digitalcommons.library.umaine.edu/cgi/viewcontent.cgi?article=1108&context=honors.

[3]Charles Wheelan, Naked Economics Undressing The Dismal Science (New York: W.W. Norton & Company, Inc., 2010, 1935

[image 1] “Pablo Escobar, The Druglord.” Accessed October 21, 2016. https://www.viki.com/tv/12488c-pablo-escobar-the-druglord#!

 

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