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Economic Inquiry
(ISSN 0095-2583)
Vol. 37, No. 3, July 1999, 401-411 OWestern Economic Association International
402 ECONOMIC INQUIRY
The 1988, 1990, and 1991 surveys are very price of one pure liter of alcohol, was created
similar, except for size. The 1991 survey is from the beer, wine, and spirits prices. This
over three times as large as the 1988 and 1990 computation was done by first computing the
surveys. The 1991 survey is larger, in part, price per liter for each beverage. The price of
because six primary sampling units were over- beer is reported for a six-pack. The price was
sampled. Each survey also oversamples per- divided by 2.13, which is the number of liters
sons aged 12-17, Hispanics, and blacks. A in a six-pack. Since the price of wine is re-
summary of the variable definitions and ported for a 1.5-liter bottle the wine price was
means are included in Table I. The means pre- divided by this number. Spirits prices are re-
sented in this table are weighted so that they ported for a liter bottle. Next, the these liter
are comparable to a random sample of the prices were divided by the percent alcohol in
United States.* each beverage (.04 for beer, .1 1 for wine, and
The dependent variables in this study are a .41 for spirits). A weighted average price of
continuous measure of alcohol consumption pure alcohol can now be computed. The
and two dichotomous measures of marijuana, weights are the share of pure alcohol con-
cocaine, and heroin participation. The alcohol sumption represented by each beverage.
consumption variable measures the number of These weights are .569 for beer, .1 13 for wine,
days in the past 31 days that the individual and .318 for spirits. These weight data come
had consumed alcohol. Marijuana, cocaine, from the Brewers Association of Canada In-
and heroin represent most of the illicit drug ternational Survey. The price was then ad-
use in the United States. The first illicit drug justed to the real value in 1982-84 dollars.
participation variable is equal to one if the Prices for cocaine and heroin come from
individual reports that he or she had used the the U.S. Department of Justice, Drug Enforce-
substance during the past year, and the second ment Agencys (DEA) STRIDE (System to
illicit drug participation variable is for use in Retrieve Information from Drug Evidence)
the past month.3 The number of individuals data set.5 DEA agents and police narcotics of-
that report participation in the past year is ficers purchase illicit drugs regularly. The
about double the monthly participation for all price, purity, weight, and other information
three drugs. Annual participation may be in- are recorded in the STRIDE data set. One rea-
terpreted as reflecting more occasional use, son these price data are collected is so that
while participation in the past month may be DEA agents will know how much to offer
interpreted as more regular use. when negotiating to buy from drug dealers.
The price of alcohol consists of the prices The price data are fairly accurate, since inac-
of beer, wine, and distilled spirits. Data on the curate data would endanger these agents. The
prices come from the American Chamber of STRIDE data set provided by the DEA to the
Commerce Research Associations quarterly National Bureau of Economic Research
Inter-City Cost of Living Index (1988, 1990, (NBER) contains cocaine and heroin data
1991). This index contains prices, inclusive of from 1977 through 1989 and 199 1 for approx-
taxes, for over 250 cities each quarter and was imately 144 cities or towns. This data set has
used to construct county-level prices. These over 23,000 cocaine price observations and
data were merged with the NHSDA on a PSU over 15,000 heroin price observations.
level.4 A single alcohol price variable, the
4. There was no American Chamber of Commerce Re-
2. The data are weighted using the analysis weight vari- search Association data available for Washington, D.C., so
able in each survey. The individual data are multiplied by an average price from urban Virginia and urban Maryland
the weight variable and then divided by the sum of the was used.
weight variable for the survey. The means for combined 5. There are price data for marijuana from the Drug
data are computed as a weighted average of weighted Enforcement Agencys Domestic Cities Report. These
means for the three surveys. These weights are defined as prices are for retail and wholesale commercial grade mar-
the sample size divided by the total size of the three sam- ijuana for 19 cities in 16 states. Use of these data required
ples. a significant reduction in the number of observations used
3. There is some continuous quantity data, but they do in the analysis. A number of alternative estimates of the
not use standard measurement units, that is, bongs per day. price of marijuana were made with these data. The resulting
There is also number of days used during the past 30 days. price variables were inconsistent with all other price data
A number of trial regressions done with these number of in the data set and resulted in unstable coefficients when
days variables produced unstable and inconsistent results. used in a series of alternative demand specifications. For
For these reasons these data were not used. these reasons, these marijuana price data were not used.
404 ECONOMIC INQUIRY
TABLE I
Weighted Average Means from the Combined
National Household Survey of Drug Abuse
1988, 1990, 1991
Variable Definition and Mean
Alcohol Use The number of days alcohol was used in the past 3 I days, p = 3.49
Heroin Participation Dichotomous indicator equal to one if a respondent reports using heroin in the
past year, p = .OO I I ; and past month p = ,0004.
Cocaine Participation Dichotomous indicator equal to one if a respondent reports using cocaine in the
past year, p = .02; and past month, p = .0085.
Alcohol Price The price of a liter of pure alcohol in 1983 dollars, p = $24.78.
Marijuana Participation Dichotomous indicator equal to one if a respondent reports using marijuana in the
past year, p = .07 I ; and past month, p = ,045.
Marijuana Decriminalized A dichotomous indicator equal to one for states that have eliminated incarceration
as a penalty for most marijuana possession offenses, p = ,303.
Heroin Price Price of one pure milligram of heroin in 1983 dollars, p = $8.36.
Cocaine Price Price of one pure gram of cocaine in 1983 dollars, p = $1 I I .47.
Marital Status A dichotomous variable equal to one if married, p = ,569. A dichotomous variable
equal to one if marital status was missing is also included, p = ,033.
Age 12-20 A dichotomous variable equal to one if an individual is 12-20 years of age, p =
.155.
Age 21-30 A dichotomous variable equal to one if an individual is 21-24 years of age, p =
,197.
Black A dichotomous variable equal to one if an individual self-reports that they are
black, p = ,116.
Hispanic A dichotomous variable equal to one if an individual self-reports that they are
Hispanic, p = ,078.
Notes: Final sample size when missing values were excluded is 49,802. All data are weighted. The elasticities were
computed with unweighted data.
Information on the date and city of pur- one gram of pure drug was obtained, by year
chase, its total cost, total weight in grams, and and city, from a regression of the natural log-
purity (as a percentage) are recorded in arithm of the total purchase cost on the natural
STRIDE. The data must be adjusted because logarithm of weight, the natural logarithm of
total cost rather than price is recorded. If total purity, and dichotomous variables for each
cost were proportional to weight, price could city and year in STRIDE except one. Imper-
be calculated as the former divided by the lat- fect information about purity is addressed by
ter. In fact, this is not the case, because larger predicting purity based on the other regres-
purchases tend to be wholesale purchases. sors. To identify the total cost model, the co-
Variation in purity and imperfect information efficient of the natural logarithm of predicted
about purity on the part of purchasers further purity is constrained to equal the coefficient
complicate the issue. Therefore, the price of of the natural logarithm of weight. The natural
SAFFER & CHALOUPKA: THE DEMAND FOR ILLICIT DRUGS 405
logarithm of the price of one gram of pure Total personal income is defined as income
drug is then given as the sum of the intercept, from all sources including wages, self-em-
the relevant city coefficients, and the relevant ployment, social security, public assistance,
time coefficients. This procedure eliminated child support and other pension income. These
variations in price or unit cost due to varia- are age, race, gender, and marital status. Two
tions in weight or purity. The antilogarithm of dummy age variables have been included to
this predicted price is the price of one unit of allow for differential age effects. These dum-
100% pure drug. The local level prices were mies are for ages 12-20 and 2 1-30, with over
aggregated to the state level. This aggregation 30 the omitted age category. Three dichoto-
was computed as a weighted average of all the mous variables equal to one if the individual
represented cites in the state. The population reports that they are black, Hispanic, or male,
weights for each city were computed by di- respectively, have also been defined. Marital
viding the city population by the total popu- status may also affect drug use. A dichoto-
lation of all represented cities in the state. The mous variable equal to one if the individual
population data come from the City and is married has been defined. Since there are a
County Databook (1993), published by the number of missing values for this variable, a
U.S. Department of Commerce. Prices were second variable was defined. The second vari-
adjusted to their real value in 1982-84 dollars. able is defined as equal to one if the marital
There are two issues regarding the price status data are missing and the missing data
data that are important. The first issue is the on marital status are recoded to zero.
exogeneity of price. If drug supply is upward
sloping, then price and quantity would be en- IV. REGRESSION RESULTS
dogenous. Since the predicted price variable
used in the regressions comes from a reduced Tables 11-V present the estimation results
form model, however, it is uncorrelated with for alcohol, marijuana, cocaine and heroin, re-
the error term in the demand equation. The spectively.6 The alcohol use equations were
second issue is measurement error. Merging estimated using ordinary least squares and the
individual level data with state level prices drug participation equations were estimated
introduces a potential for measurement error using probit. Five specifications for each
due to matching. Any measurement error cre- substance are presented. These specifications
ated by the matching problem is probably include alternative combinations of the own
small since, in each state, most drug users are price and other prices, or decriminalization,
in the larger urban areas and, for each state, along with a set of demographic variables and
the drug price data comes mostly from the time dummies. These alternatives are impor-
larger urban areas. If there is any matching tant since there is some collinearity between
measurement error in the price data, it will prices. The first specification includes only
bias the coefficient and t-ratio downward. the own price. The next three specifications
Thus, the reported coefficients and t-ratios are include the own price and one other price, or
conservative lower bound estimates. decriminalization. The final specification in-
Marijuana decriminalization is a law that cludes all three prices and decriminalization.
specifically eliminates criminal sanctions for For illicit drugs, the five specifications were
possession of small amounts of marijuana. estimated for both participation in the past
Decriminalization of marijuana eliminates month and for participation in the past year.
possible imprisonment for most first offense The results for the economic variables, for
possession violations. Oregon, in 1973, was each substance, are discussed first. Since there
the first state to decriminalize marijuana. By is a fair amount of redundancy in the demo-
1978, 10 other states had followed, substan-
tially reducing the penalties associated with
marijuana possession. Decriminalization, by 6. Several state fixed effects models, which resulted in
lowering the penalties associated with mari- insignificant price coefficients, were also estimated. The
juana use, is expected to increase marijuana inclusion of state dummies tends to eliminate the effect of
variables measured at the state level, such as price.
demand. 7. According to Maddala (1983), weighted regressions
Income and a group of dichotomous demo- are not necessary since the sample design is based on ex-
graphic variables have also been defined. ogenous variables.
406 ECONOMIC INQUIRY
TABLE I1
Alcohol
Variable Days Used in Past Month
graphic variables, these variables are dis- prices are negative and significant in all four
cussed for all four substances as a group. specifications, suggesting complementarity.
Table 11 presents the results for alcohol use. The income variable is positive and signifi-
The own price is negative and significant in cant in all five specifications.
all five specifications. Marijuana decriminal- Table 111 presents the results for marijuana
ization is insignificant in one specification participation. Decriminalization is positive
and negative and significant in the other. The and significant in all 10 specifications. The
negative sign suggests substitution between cross price effect of marijuana decriminaliza-
alcohol and marijuana. Cocaine and heroin tion with alcohol is insignificant in three of
TABLE 111
Marijuana
Variable Participation in Past Month Particiltation in Past Year
Intercept -1.688 -1.654 -1.527 -1.63 1 -1.529 -1.528 -1.413 -1.351 -1.470 -1.27 1
(46.90) (20.44) (20.65) (32.92) (15.44) (47.97) (20.03) (21.01) (33.91) (14.76)
Alcohol Price - 4.0013 - - 0.00073 - 4.0047 - - 4.003
(0.48) (0.24) (1.90) (1.15)
Marijuana Decriminalization 0.154 0.149 0.124 0.142 0.118 0.152 0.145 0.119 0.140 0.113
(7.85) (7.21) (5.42) (6.83) (4.91) (8.86) (8.07) (5.95) (7.70) (5.40) rn
P
Cocaine Price - - 4.0013 - 4.0012 - - 4.0014 - 4.0014 Fp
(2.48) (1 .W) (3.16) (2.60)
Heroin Price - - - 4.0076 4.0043 - - - 4.0078 4.00095
(1.66) (0.75) (1.95) (0.19)
Income 4.0000001 7 4.00000013 4.00000001 4.00000024 4.00000001 0.00000027 0.00000027 0.00000028 0.00000026 0.00000028
(0.15) (0.10) (0.086) (0.21) (0.085) (2.60) (2.59) (2.69) (2.54) (2.67)
Gender 0.293 0.292 0.293 0.294 0.292 0.271 0.270 0.270 0.271 0.269
(15.10) (14.67) (15.08) (15.11) (14.65) (16.01) (15.55) (15.97) (16.02) (15.51)
Marital Status 4.403 4.397 -0.403 4.40 1 4.396 4.419 4.407 4.418 4.417 4.406
(16.25) (15.62) (16.23) (16.17) (15.59) (19.26) (18.25) (19.22) (19.16) (18.22)
Dummy for Marital Status 4.833 4.823 4.833 4.834 4.824 4.798 4.787 4.797 4.798 4.787
(17.31) (16.87) (17.31) (17.32) (16.88) (21.60) (20.92) (21.60) (21.62) (20.92)
Age 12-20 0.246 0.255 0.248 0.247 0.256 0.410 0.422 0.413 0.412 0.424
(8.33) (8.37) (8.39) (8.36) (8.42) (15.77) (15.70) (15.86) (15.81) (15.78) 8P
Age 21-30 0.453 0.458 0.454 0.454 0.450 0.529 0.534 0.530 0.529 0.536
(18.55) (18.24) (18.57) (18.56) (18.25) (24.34) (23.90) (24.39) (24.36) (23.94)
Black 0.013 0.012 0.010 0.01 I 0.010 4.075 4.077 4.078 4.076 4.079
(0.58) (0.52) (0.45) (0.50) (0.42) (3.77) (3.72) (3.91) (3.85) (3.83)
Hispanic 4.217 4.209 4.233 4.225 4.226 4.260 4.257 4.277 -0.268 4.274
(8.68) (8.17) (9.03) (8.83) (8.56) (12.00) (11.59) (12.42) (12.15) (11.98) c
1990 4.162
(5.13)
4 . I75
(5.31)
4.162
(5.12)
-0.170
(5.31)
4.176
(5.28)
4.141
(5.07)
4.158
(5.44)
4.141
(5.05)
4.149
(5.29)
-0.156
(5.32)
2
1991 4.137 -0.144 4.146 4.I44 4.155 4.101 4.114 -0.110 4.108 4.123
(5.41) (5.49) (5.70) (5.61) (5.82) (4.50) (4.91) (4.89) (4.77) (5.25)
R-Square 0.083 0. I27 0.083 0.083 0.1275 0.087 0.134 0.088 0.087 0.135
N 49802 47224 49802 49802 47224 49802 47224 49802 49802 47224
Percentage Change
due to Decriminalization 0.09 0.09 0.08 0.09 0.07 0.09 0.08 0.07 0.08 0.06
P
s
408 ECONOMIC INQUIRY
P
0
W
f
TABLE V 0
Heroin
Variable Participation in Past Month Participation in Past Year
Intercept -2.592 -2.738 -2.532 -2.742 -2.93 1 -2.377 -1.878 -2.291 -2.484 -1 349
(11.12) (7.09) (9.52) (8.74) (5.37) (14.49) (7.31) (1 2.49) (1 1.40) (5.24)
Alcohol Price - 0.01 1 - - 0.01 I - -0.024 - - -0.025
(0.71) (0.71) (2.38) (2.49)
Marijuana Decriminalization - - -0.052 - 0.052 - - -0.082 - -0.067
(0.48) (0.39) (1.09) (0.73)
Cocaine Price - - - 0.002 1 0.00 I7 - 0.0015 0.00094
(0.72) (0.48) (0.74) (0.40)
Heroin Price -0.066 -0.076 -0.073 4.079 -0.081 4.059 -0.041 -0.068 -0.068 -0.055
(2.37) (2.36) (2.29) (2.31) (2.09) (3.23) (2.05) (3.31) (3.04) (2.22)
Income -0.000014 -0.00001 I -0.000014 -0.00001 4 -0.00001 1 -0.00001 1 4.0000077 -0.00001 1 4.0000 1 1 -0.0000079
(2.03) ( I .54) (2.03) (2.07) (1.56) (2.36) (1.63) (2.36) (2.37) (1.66)
Gender 0.322 0.25 1 0.322 0.324 0.252 0.217 0.161 0.218 0.218 0.162
(3.28) (2.41) (3.28) (3.29) (2.42) (3.24) (2.31) (3.24) (3.24) (2.32)
Marital Status -0.279 -0.233 4.278 -0.277 -0.232 4.260 -0.229 -0.260 -0.259 -0.229
(2.24) (1.81) (2.24) (2.23) (1 3 0 ) (2.92) (2.47) (2.92) (2.91) (2.46)
Dummy for Marital Status -0.5 12 -0.463 -0.509 -0.5 12 -0.467 -0.281 -0.277 -0.282 -0.282 -0.277
( I .77) (1.60) ( I .76) ( I .77) (1.61) (2.04) (1.99) (2.04) (2.05) ( I .99)
Age 12-20 -0.292 -0.228 -0.293 -0.294 -0.229 -0.134 -0.050 -0.136 -0.135 -0.053
(2.13) (1.55) (2.14) (2.14) (1.55) (1.40) (0.50) (1.42) (1.41) (0.53)
Age 21-30 -0.040 -0,034 -0.040 4.039 -0.034 -0.037 -0.046 -0.038 -0.037 -0.047
(0.35) (0.28) (0.36) (0.35) (0.28) (0.45) (0.52) (0.46) (0.4) (0.52)
Black 0.192 0.062 0.188 0.188 0.064 0.024 -0.064 0.018 0.022 -0.069
(1.83) (0.52) (1.78) (1.79) (0.53) (0.33) (0.78) (0.24) (0.30) (0.83)
Hispanic 0.048 0.027 0.048 0.061 0.038 -0.128 -0.151 -0.126 -0.118 4.142
(0.42) (0.23) (0.42) (0.53) (0.31) (1.51) (1.71) (1.48) ( I .37) (1.58)
1990 -0.253 -0.251 -0.257 4.263 4.256 -0.085 -0.139 -0.094 -0.094 -0.I54
(1.48) (1.46) (1.51) (1.54) (1.47) (0.73) (1.16) (0.81) (0.80) ( I .28)
1991 -0.128 -0.198 4.129 -0.124 -0.194 -0.039 -0.089 -0.040 -0.036 -0.090
(I .03) (1.54) (1.04) (1 .OO) (1.51) (0.42) (0.94) (0.43) (0.38) (0.95)
R-Square 0.079 0.203 0.079 0.079 0.203 0.058 0.138 0.059 0.058 0.139
N 49802 47224 49802 49802 47224 49802 47224 49802 49802 47224
Elasticity 4.82 -0.98 -0.90 4.98 -1.03 -0.88 -0.60 -1.02 -1.02 -0.8 I
SAFFER & CHALOUPKA: THE DEMAND FOR ILLICIT DRUGS 41 1
drug users prefer to use various drugs together On the other hand, the increase in drug use
rather than to substituted one for the other, could be overstated, since demand elasticities
The elasticities can be used to predict the decrease at lower prices. The demand elastic-
effect of legalizing cocaine and heroin. These ity is likely to be considerably lower at a 50%
estimates should be viewed with caution, lower price. Whether the estimates are over-
since several assumptions must be made in statements or understatements, the potential
order to do the calculations. Legalization increase in public health problems are not the
could take a number of alternative forms, de- extremes that some analysts predict. A com-
pending on whether only sanctions against plete analysis of drug legalization should ac-
buyers or sanctions against both buyers and count for the costs of drug prohibition as well
sellers were reduced and the magnitude of the as the benefits of drug prohibition.
reductions in sanctions. The reduction of price
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