The Economics of Decriminalising Drugs

David Li


March 29th, 2021

Join David as he deep dives into the drug decriminalising dilemma.

There has been a lack of sound economic analysis utilised by governments regarding drug policies throughout modern history. In its place, rhetoric and populism has enforced a societal norm that exacerbates the harms of drugs. This has encouraged increased punishment to drug-users from both a legal and a cultural perspective, which not only increases the risks faced by those either susceptible to addiction or already addicted, but also imposes negative externalities on those who drug laws claim to protect. Although the opinions of economists on drug policy are widely dispersed, there is a majority who favour decriminalisation (Thornton, 2007). Decriminalisation prevents those found with drugs intended for personal use to be charged for criminal offence; in addition, it advocates for the government to regulate a drug market. Although legalisation may enhance some the positive effects of a regulated drug market that will be discussed, it is recognised that it will require a significant cultural shift which will not take place for decades to come. Through examination of the perceived damages of drugs and a number of important factors (albeit not an exhaustive list), it is clear that increased discussion around decriminalisation of drugs and scrutiny of drug enforcement can benefit society.

The current prohibition has created a black market for drugs. This black market precipitates two market imperfections, which are information asymmetry and negative externalities (Harkins, 2004). Information asymmetry arises from sellers withholding information regarding the purity of their commodities; furthermore, it is clear that many buyers are not always conscious of the long-term effects of drug consumption. The negative externalities produced through consumption often refer to the crimes drug-users partake in to feed their addiction. Negative externalities on the production side embody high levels of violence as gangs jostle for the dominant market position, leading to spill-over effects on the innocent. By no means is this an exhaustive list of economic downsides to drug consumption; however, it illustrates the effects of the dogmatic approach of western governments on drug enforcement. Instead, governments should aim to reduce market imperfections within the drug market, and also take advantage of the taxation of a well-regulated drug market to fund programs that effectively decrease demand for drugs.

Decriminalisation coupled with government regulation would effectively tackle the perceived damages caused by current drug consumption. The main case against decriminalisation is the notion that this encourages drug use, especially amongst young people who are vulnerable to addiction. Thinking in terms of a simple supply and demand model, this is also a reasonable argument, as the positive supply shock will decrease prices and thus increase quantity. However, as Becker (2001) argues, this increase in quantity can be partially offset through the government taxation on the market. Similarly, Barro (1997) states that it is apt to levy substantial taxes on the sale of drugs, in addition to restrictions on sales to minors. The taxes raised should be wholly contributed to rehabilitate addicts and the education of the entire population on the harmful effects of drugs, and responsible use to minimise health risks. Moreover, decriminalisation allows for the reallocation of a portion of drug enforcement funds to the rehabilitation and education programs. Again, this curbs demand, but also has the added advantage of eliminating lobbying and corruption with law enforcement, whose departments vie for limited funds. Furthermore, decriminalisation will not affect the portion of the economy that have strong preferences against taking drugs. This implies that their indifference maps do not change, and thus a decrease in the price of drugs will not change the point where utility is maximised. Although lacking in quantitative rigour, this overview of the proposed market system for drugs should illustrate that it is a feasible system which prioritises health through economic means.

The proposed market system can also account for the market imperfections present in the current black market. Information asymmetry can be resolved through secure testing of the drugs done by the government such that there are no harmful impurities mixed in with the drugs. There is also sentiment to establish a licensing scheme which identifies drugs safe for consumption (Harkins, 2004). Furthermore, the government should set up anonymous testing sites, which allow users to test their personal stash intended for consumption. Externalities associated with users can be minimised through increased funding on rehabilitation, and re-education of drug enforcement to escort users to clinics instead of police stations. Clague (1973) takes this a step further through the suggestion of depots where drugs are distributed free of charge, which largely eliminates instances where users turn to crime to fund their drug use. This has the additional benefit of providing safe equipment for drug-taking (clean needles, safe environment etc) which prevents blood-borne infections such as HIV, lessening the burden on public health. Externalities associated with producers can also be subverted through rolling back the degree of prohibition. As Miron and Zwiebel (1995) identified, a high degree of prohibition has a dual effect of increasing the marginal benefit, and decreasing the marginal cost of violence, thus encouraging it. Therefore, decriminalisation may also reduce unnecessary gang violence. This also encapsulates positive externalities for other areas of the economy which are complementary to increase security.

The issue of decriminalisation should be a central issue in government policy decisions in the 21st century. Unfortunately, out of the $1.7 billion government budget for combating drug use, a vast 66% is employed in drug enforcement (Drug Policy Australia, 2020). This figure also does not account for prison expenses. Whilst decriminalisation advocates for reduced drug enforcement, it does not discount its utility for combating illegal organised suppliers in the form of gangs or mobs. Instead, it highlights the need to shift the majority of the budget to prevention, harm reduction and treatment for users. Although Australia has already made headway into safe injecting rooms and pill testing, the progress has been far too slow. Fortunately, the issue of reducing prohibition may be one of the issues that can achieve bipartisan support. The left has been primary advocators for decriminalisation, whereas prominent conservative and free-market economists such as Milton Friedman and Gary Becker have also voiced their consent for not just decriminalisation, but liberalisation of the drug market (Thornton, 2007). Hence, a more lively and active conversation on decriminalising drugs involving all Australians could potentially bear fruit that would achieve increased societal welfare.


Barro, J. (1997). Getting it Right: Markets and Choices in a Free Society. MIT Press.

Becker, G. (2001). It’s Time to Give Up the War on Drugs. Business Week.

Clague, C. (1973). Legal Strategies for Dealing with Heroin Addiction. American Economic Review, 63(2), 263-269.

Drug Policy Australia. (2020). Legal Regulation of Drugs to Protect Your Family.

Harkins, I. (2004). An Economic Perspective on Drug Prohibition. Student Economic Review, 18(1), 275-287.

Miron, J., A., & Zweibel J. (1995). The Economic Case Against Drug Prohibition. The Journal of Economic Perspectives, 9(4), 175-192.

Thornton, M. (2007). Prohibition versus Legalization: Do Economists Reach a Conclusion on Drug Policy. The Independent Review, 11(3), 417-433.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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