Ever since David Luhnow’s article in the Wall Street Journal on how drug legalization in the U.S. could reduce the horrific violence going on in Mexico right now, I have been mulling over writing about it. Happily, David Henderson has done so at Econlog, and much of his commentary is along the lines that I’ve been thinking.
… the demand for illegal drugs from Mexico would decline. The reason is simple: the implicit tax in the U.S. would fall to zero. The implicit tax imposed by the Mexican government would stay high. It’s as if the U.S. government was imposing both a tariff on imports, a tax on domestic production, and a tax on domestic consumption, and then suddenly ended the tax on domestic production and the tax on domestic consumption. The amount demanded would rise because of the lower tax, but domestic production, suddenly facing a much lighter tax burden, would be advantaged relative to imports. Therefore domestic production would rise, crowding out imports. The net effect on imports is likely to be negative. So, yes, the supply chain in Mexico would be illegal and organized crime would be the supplier, but they would supply less to the United States, the main area of consumption.
Not only would they supply less, but because they would be competing with suppliers charging lower prices (presumably), their revenues would fall as well as their quantities sold (note also that this result reflects the reasonable assumption that the demand would be inelastic, in which case prices and revenues move in the same direction). That revenue hit is where the real power to undermine drug gangs lies.
The rest of David’s analysis is excellent and worth a read.