Coca Production Following the Laws of Supply and Demand

Article #6

Coca Production Still Seems to be Following the Laws of Supply and Demand

News Story

The United Nations found last year that coca production in Colombia by 18 per cent. The smaller yield on the plant caused the UN to estimate that cocaine production (produced from the coca plant) had fallen by 28% there. Results are encouraging. But what's driving the reduction?

First, governments are focusing on "manual eradication" as opposed to chemical treatments on the plants. Chemical spraying from the air only eliminates the harvest, not the bush itself, and also has a tendency to hit nearby food crops. By manually eradicating-tearing out of the ground-the bushes are gone for good. This tends to permanently reduce the harvest of coca. The governments are also helping farmers to become involved with other, more legal, crops, such as coffee, cacao and palm oil.

Secondly, the government has been winning battles against guerillas involved in the drug trade. As a result, it's been easier for the government to get in and manually work on the coca bushes.

But it's foolish to think that overall supply is dwindling. Demand is still strong from the United States, and someone is going to supply it. The price has more than doubled to $200 per gram of pure cocaine, causing a significant benefit to those involved in the trade. If not the Colombians, then it is beginning to be the Peruvians further south.

The downside to all of these is that we really don't know how much coca is produced; we only have estimates. And because there is such a strong demand for cocaine, new territory gets farmed any time the government shuts down one particular field. If we are interested in getting rid of cocaine, we not only have to give farmers an incentive to produce something other than coca, but we have to get people further north in the US less reason to want the drug. Whether this comes through education or regulation is the subject for another article. But controlling demand must coincide with controlling supply.

Questions

Discussion Questions:

1. What is the difference in the market for cocaine production between a government's efforts to get people to reduce their demand for cocaine, and the government's efforts to get farmers to produce something else on the land?

2. Suppose the government had to choose between funding a program designed to educate consumers about the dangers of cocaine consumption, and a program designed to raise the sentencing guidelines of those caught with cocaine. What is the difference between these two policies in the market for cocaine?

3. What does "manual eradication" of the coca bushes do the opportunity cost of cocaine production?

Multiple Choice/True False Questions:

1. The price of cocaine in the US is rising because the demand for the product is rising.

1. True
2. False

2. What should happen to the price of Colombian-produced coca if fewer farmers are cultivating it?

1. Price should rise
2. Price should fall
3. Price should not change
4. Price should fall to zero.

3. Peruvians have begun entering the market for coca production because of the possibility of

1. Positive economic profit
2. Positive accounting profit
3. Negative economic profit
4. Negative accounting profit

Response is 1,170 words