This is a source for analysis, interviews, and commentary on security in Latin America. Herein you will find rumors, the results of off the record interviews, and information you'll not find in international or United States news media.

Thursday, May 14, 2009

Demand (in)elasticity for cocaine in EU

I'm in Portugal this week, so I've been curious to find out more from local contacts (here and in Spain) about the demand for cocaine in the EU.

Spain, by the way, is by far at the top of the countries over here that report high levels of cocaine use.

This morning, I saw a piece from La Semana, which reported on this item from the BBC which states that the price for cocaine is higher in EU, while the quality is less pure.

According to the article, the price for a kilo of cocaine (likely not a pure kilo) in the UK was US$59,500 in 2008, and is US$68,700 in May 2009. Retail prices, the BBC article mentioned, have remained the same. So let's just focus on wholesale...

We've seen that kind of statement before in the US (here is a summary), usually from the DEA or the Drug Czar's office (both obviously biased sources). And we've seen the opposite, from the same source, but over here in Europe, I wonder about the elasticity of demand for cocaine since the EU is a relatively untapped market with a number of independent actors at the wholesale and retail level.

When considering price elasticity for anything, there are some key determinants at play, such as necessity and duration.

Necessity is probably pretty high, as addiction dictates that users will continue to "need" coke, even as the price goes up. This would point to a more inelastic demand curve.

The duration of this price hike is likely short. pure coke is always in storage somewhere, so the groups shipping the product to the EU can pump up the volume when necessary, which would drive down price (but never too low) and improve quality (never too high). If the duration is short, we again have an ineslastic demand curve.

Now, my econ 101 teacher would probably tell me that we shouldn't think about price elasticity for illegal products because the black market does not play by the rules. For me, it's an interesting exercise b/c I'm interested in seeing how long the cocaine market will continue to grow in Europe. How deep will it go? That is, how many countries, cities, etc. will begin to report on cocaine addiction and the resulting health problems.

Looking at how the EU deal with this growing social health problem will be an interesting point of comparison to the US. On one side of the Atlantic (the US) we've seen supply-side interdiction efforts and a heavy hand towards interdiction, with little effort put into prevention and harm reduction. What will the EU do?

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