The Economics of Drug Cartels

By Harrison Dean

No one likes drug cartels. But does government policy play a role in creating and sustaining them?  Most people have probably never even considered the question. But when we consider the economics of prohibition, it becomes clear that prohibition benefits drug cartels.

What is a cartel? A cartel is a group of producers who work together to restrict competition and keep prices artificially high. Cartels are very difficult if not impossible to sustain on the free market, due to market forces. Today, many cartels exist due to government prohibition. It works like this: When the government prohibits a desired good, it restricts the supply which leads to higher profits to those who are willing to risk selling the prohibited substance. Hence the extremely high profits, combined with the absence of peaceful arbitration in the courts, accounts for the universal violence we see with drug cartels. The government and the cartel both restrict competition, the state through prohibition, and the cartel through violence.

If marijuana (for example) was legalized there would still be demand for it, and legal businesses would be incentivized by potential profits to start growing and selling it. This would severely  uncut (if not eliminate) the profits of the drug cartels. Cartels may be experts in using violence to restrict competition, but this only works when the state outlaws a product, thus ensuring the market is controlled by outlaws, rather than legitimate businesses. On the free market a business is an entity whose function is to make a profit, they survive because they satisfy consumer desires. Cartels survive because they are able to sell a prohibited substance at high profits, and they are able to use violence to suppress their competition.

Cartels only produce violence and black market goods better than legal businesses. In a hypothetical example of a prohibition free America, gangs and everyone who produced the drugs when they were illegal, would be unable to compete when big enterprises started producing the decriminalized substances.

This economic reasoning applies to anything the government bans. It was clearly demonstrated in the early 20th century during alcohol prohibition. It is common historical knowledge that during prohibition crime increased, criminal gangs became rich making poor quality alcohol, and violence ensued.

In the present day, the same thing is happening: cartels on the black market are making high profits, while resolving disputes with bullets.  However, even when marijuana is legalized in just two states these drug cartels start to lose their profits.  The Washington Post reported on this back in April:

Farmers in the storied ‘Golden Triangle’ region of Mexico’s Sinaloa state, which has produced the country’s most notorious gangsters and biggest marijuana harvests, say they are no longer planting the crop. Its wholesale price has collapsed in the past five years, from $100 per kilogram to less than $25.

"It’s not worth it anymore," said Rodrigo Silla, 50, a lifelong cannabis farmer who said he couldn’t remember the last time his family and others in their tiny hamlet gave up growing mota. "I wish the Americans would stop with this legalization."

Prohibition creates cartels of whatever good is prohibited. Freedom is the solution to the cartel problem.

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