The social and economic failure of the so-called “War on Drugs” is now widely known. One issue that is often mentioned but rarely explained is the increasing potency of illegal drugs, whether it be cannabis with a high percentage of THC in the US or super potent MDMA (Ecstasy) in Europe.

What’s behind this phenomenon? A lesser known but highly interesting economic theory might have the answer.

This concept has been studied and applied. If you find it interesting and want to look into further, check out Richard Cowan’s work “The Iron Law of Prohibition.” It is nicely explained here. Another recommendable read is from Mark Thornton. He explains in detail why alcohol prohibition was a failure.

The Alchian-Allan Theorem

The theory that can explain rising drug potency under prohibition was first described in 1964 by Armen Alchian and William R Allen. It states that when the price of two substitute goods is increased by a fixed per-unit amount (such as transportation or taxation) the consumer will opt for the higher priced, higher quality good because the price of the more expensive product has sunk in proportion to the price of the less expensive product.

A quick example: You have two wheels of cheese: one is $5 and medium quality and one is $10 and good quality. The more expensive one is twice as expensive as the cheaper one.

Let’s add $5 of a fixed cost (because the cheese needs to be transported to wherever you are). While the ratio of both costs is still the same in the country it was produced, the more expensive one ($15) is now only 1.5 times as expensive as the cheaper one ($10) where you live.

It is now, relatively speaking, less expensive and because of this, consumers opt to get it. This can be applied to almost any good.

How Does This Relate to the Potency of Illegal Drugs?

In the particular case of illegal drugs, two different kinds of drugs–let’s say two different kinds of cannabis–act as the substitute goods.

When buying illegal drugs on the black market, you do not only pay for the drug itself. On top of the monetary price comes the potential social cost you pay. This can range from a small regulatory offence, where you must pay a fine, to a felony where you can face a prison sentence.

This comes with other problems: losing your job, family, social status and so on. This is the fixed per-unit cost added on top of the price of the drug itself. It is not worth the risk to buy a low-quality product regarding the potential price you must pay.

In other words, why would you go through the trouble of finding a drug dealer, buy the product, pay a potentially high social price and then receive an inferior quality product?

If you buy drugs–let’s use cannabis as an example again–you want the one that sends you and your friends towards a journey of endless laughter and philosophy. You don’t want the one where you go “meh” after smoking.

Drug cartels have recognised this behaviour and increased the potency of their drugs (i.e. improved the quality of their product) so you get more value for the potential fixed per-unit cost you pay. The cost-benefit ratio for you as customer has increased. The relative price has decreased. This does not only relate to illegal drugs but can be traced back in history: during the American prohibition of alcohol, the potency of alcoholic beverages increased.

Why Does It Matter?

I said earlier that the quality of the product (i.e. potency of the drug) increases. What sounds good in economic theory becomes a massive public health problem in real life. The potency of many drugs has increased too much. As it is in most prohibitionist countries, many consumers don’t know exactly what drug they are taking and in which dosage they are consuming the drug: not to mention added substances that increase quantity.

Right now, the US is facing a massive opioid epidemic. It is estimated that the economic impact from prescription opioids and opioid poisonings is $75 billion annually. Six out of ten drug-related deaths can be traced to opioids. This comes from a sharp increase of fentanyl-laced heroin, a cheap synthetic opioid and analgesic that is 50-100 times stronger than heroin. It should be obvious that the potential risk for overdosing is massively increased.

This does not only apply to the US opioid epidemic. Drugscouts, a Germany-based organization, finds MDMA pills that contain more than 100 mg of the substance on a regular basis; same goes for the UK. This entails the potential for overdosing and severe health consequences and negates the purpose of taking MDMA in the first place: to just have a good time.

What Does This Mean for Policy?

For over 40 years, now we have seen that prohibition does not stop people from taking drugs. No matter how much money we spend on police, drugs with increased potency are widely available for anyone who wants them.

International experts have called for a new approach toward this problem, one that is consumer friendly and does not help finance drug cartels, yet does not neglect the fact that many drugs are harmful and potentially lethal.

If drugs were decriminalized, customers would have knowledge about the contents of their MDMA, their cocaine, their cannabis. Drugs that are too potent could easily be avoided. Legalized drugs would include packaging with the specific content. Sales in specialized stores would allow customers to receive medical help if they show signs of problematic consumption, without fear of being imprisoned over it.

Until this happens, politicians fail to protect their people from harm that can easily be prevented.

Nils Biedermann


Nils Biedermann

Nils Biedermann is a Political Science and Public Administration student at the University of Konstanz, Germany. He writes about drug policy.

This article was originally published on FEE.org. Read the original article.

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