Reference no: EM131295787

NOTE: Answers must be typed and submitted in hard copy. Use of a graph for part (a) could be helpful but NOT mandatory.

The CBC covered a London School of Economics report as saying the "war on drugs [is] a global failure." They state the report offers "compelling evidence that achieving a 'drug-free world' based solely on a prohibitionist model is an expensive and wasted effort" and governments' focus on supply reduction efforts in its "war on drugs" have been relatively unsuccessful at addressing illegal drug use.

Source: Janelle Jordan "War on drugs a global failure, London School of Economics says" CBC News, May 9, 2014 (https://www.cbc.ca/news/business/war-on-drugs-a-global-failure-london-school-of-economics-says-1.2636263)

Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example, through drug education and voluntary treatment programs for addicts.

a. Suppose the price elasticity of supply for cocaine is -0.5. What will happen to the equilibrium price, quantity, and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine?

b. Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine. As a result of the reduction in supply the price of cocaine increases by 25 percent. If the price elasticity of demand is -0.5, what is likely to happen to the incentive to sell cocaine?

c. Based on your answers, explain why one approach might be preferred over the other.