The Economics of Drug Prohibition

Drugs have been a moral menace to many societies for many years. Right from the time, the British East India Company corrupted an entire Chinese generation to the modern world where this epidemic is destroying South American nations, the curse of drugs is causing mayhem. This has led many governments in the past as well as the present to outlaw drugs and pass laws which completely prohibit their usage. If economic history is any proof, the effects have been anything but satisfactory.

The scourge of drugs has only increased in nations where strict prohibition laws were enacted. Stricter laws only turned the common man into smugglers since more scrutiny meant a higher price and therefore a bigger incentive to break the law.


Drug prohibition only makes the business more lucrative. Firstly, the government has to spend an enormous amount of money in building infrastructure to prevent drug usage. This is economic wastage as the resources being utilized here could be put to better use for more productive purpose within the country.

Moreover, law enforcement just leads to more corruption. Drug smugglers just bribe their way into the system. More law enforcement expenses lead to a higher price for the drug. As profits soar, more and more people get involved in the drug trade. Many economists like Milton Friedman have explained why an all-out war on drugs can be counterproductive and may end up increasing the drug menace.


Economies, where drug production and consumption is on a high, are also prone to excessive violence. Most of this violence occurs in the young age group who are capable of working, In the absence of such violence, these people would be working and hence the Gross Domestic Product of the nation would be higher. This would translate into higher tax revenue and hence more prosperity for the nation.

A war on drugs leads to an exponential rise in violence as can be seen from the case of countries like Columbia. A higher homicide rate is an economic detriment for the state as businesses do not want to invest in such places and hence investments are lower.


A war on drugs means smuggling drugs becomes increasingly difficult. As a result, the safety and the standard of the drugs keep on deteriorating. This has an adverse effect on the drug users. Since the users are addicted to the drug, they do not reduce consumption of the drug. Instead, they maintain their normal consumption level. As a result, medical emergencies increase. Once again the resources of the state as well as of the people are redirected towards wasteful expenditure.

Privatization of Prisons

Countries facing drug menace also have a lot of people in jail. This is the result of law enforcement expenses that we discussed earlier in this article. However, once people are incarcerated, the expenditure only increases. Maintaining a huge crowd of violent prisoners is an expensive affair. This has led many countries like the United States to privatize their prisons. Countries like Holland where many drugs have been legalized pay a far smaller number of their taxpayer dollars to maintain prisons. It needs to be understood that state cannot control people’s activities for better or for worse. If people choose to get addicted after knowing the dangers and tribulations, then it simply is their own choice.

High Correlation with Unemployment

Drug problems do not strike out of the blue. There is clear cut economic signals that precede the rising of a narco-state. The first and most obvious sign are rising poverty and unemployment. The youth of any country need to be gainfully engaged in the economic world. If such opportunities are not present, then it is highly likely that such youth would turn to criminal enterprises.

Hence, a better way to wage war on drugs would be to wage war on unemployment. Without the foot-soldiers who move drugs on a day to day basis, the system would simply collapse. Market forces are stronger than government decree in eradicating the drug problem.

No Incentive

The state proclaims that eradicating drugs is their number one priority. However, in many cases, law enforcement officers are making huge sums of money from this corruption. The last thing they want to do is get rid of the drugs. Since they do not have any incentive to eradicate the drug problem, it makes more sense for them to prolong the crisis and earn as much money from it as they can. This creates a bizarre scenario wherein, on the one hand, the government claims it wants to eradicate drugs and on the other hand, their own officers behave in a contradictory manner.

A Better Way

Countries have found that rehabilitating drug users is a much cheaper and much better way. Only people who are disappointed with their lives and have no purpose get habituated to drugs. Countries, where these people were provided a loving environment and a purpose to their life, have seen a massive drop in the drug usage rates. All this without any threat of violence or without redirecting economic resources to make this the government’s number one priority.

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