Suppose we believe that the use of illegal drugs is a public bad - that is, that one person's drug use imposes a negative externality on the rest of society. (This could happen, for example, through increased rates of other crime and general lawlessness, or through health consequences that must be paid for through higher taxes.)

Anti-drug enforcement means that both suppliers and buyers face a risk of being caught and punished. This raises the marginal cost for suppliers, and also raises the effective price of drugs faced by buyers (the cash price plus the expected punishment).

Suppose the street price of drugs is a fixed markup above the dealer's marginal cost.

(a)  Consider a proposal to focus additional enforcement efforts on suppliers, by increasing Coast Guard patrols to catch a higher fraction of people importing drugs into the country. What effect will this have on the price of drugs?

(b) Consider a proposal to focus additional enforcement efforts on buyers, by hiring more undercover police to sell drugs and arrest the people who buy from them. What will be the effect on the actual cash price of drugs? On the effective price faced by buyers?

Drug users tend to fall into two categories: casual (occasional) users and addicts. Suppose that casual users tend to be wealthier, and therefore attach a much greater financial disutility to jail time. (For example, a typical casual user might equate one year of jail time to a cost of $100,000, while a typical drug addict might equate it to $20,000.)