The Mexican Drug Lord Oligopoly makes for an interesting problem

As my undergraduate career furthers I find my classes asking similar questions:

  • How do we maximize profits?
  • How to we capture consumer surplus?
  • How do we maximize welfare?
  • How do we minimize externalities?
  • How do we design the market so it is pareto efficient?

But here is a problem that no-one ever asks. How do we destroy a market?

Last winter break I was choosing a relaxing vacation spot that wouldn’t break the bank. Given the geographic proximity, Mexico was on my list. Thats until I brought it up with one of my aunts (and by aunt I mean my parents’ friend who is a woman – it’s an Indian thing to do). She’s a travel agent and told me about the perils of visiting Mexico. So I put it off for a later date in life.

Living in the Global Citizenship theme part of Crothers Memorial (our dorm), I was able to learn a bit about the Mexican drug trade from one of my residents. Turns out it really is as bad as I was told. Too many people are involved and it’s too unsafe for visitors to enter that region and its also very unsafe for people who have lived for generations in the areas where the drug lords are centered. Lots of lives have been lost and more than that a sense of safety has also been lost. I’m sure this is a very complicated problem, but this is my understanding based off a conversation I had:

There is a demand for drugs from the US (I actually can’t even say with certainty which drug, though I would guess it would be cocaine). And Mexican drug lords are willing to supply it because the revenue from the drugs is much higher than all associated costs.

Here are a few costs for the drug lords:

  • Its illegal, so they incur some cost by hiding or bribing or threatening law enforcers
  • There is competition in the market, and this is brutal competition in the sense that drug lords could be losing friends, colleagues and family due to the internal war
  • There is also the marginal cost of producing the drug
  • I guess there is also a cost associated with distribution to the US – ie. hiring drug mules or whatever method they use
  • I’m sure there are many more that I can’t think of given my primitive understanding

There are lots of externalities associated with the market that the drug lords are obviously not paying for:

  • Loss of civilian life
  • Destruction of the legal system
  • Loss of a sense of security in surrounding areas
  • Loss of GDP due to the fewer number of tourists (and I’m sure GDP has been hurt due to several other reasons)

It’s impossible for the government to even try to get the drug lords to pay for their externalities and solve the ‘market failure’. And even if it were logistically possible, I think the externalities are too high that no single price would justify the functioning of such a market.

So here is where the economists come in. How do you destroy such a market? The obvious framework to look at is do both a demand and a supply analysis.

From the supply side – it seems that if we were to increase the costs so much that few drug lords would participate in the market seems reasonable, but how do you do this? The costs associated with the loss of life within the organization and within their personal lives doesn’t seem to do anything for the drug lords. The government can’t do too much to curtail this illegal activity. Perhaps they could raise prices for goods such as fuel and ammunition (or whatever the drug lords use in production) to a point where the costs are too high, but then that has too many implication for civilians who are unfairly victims of such policy. Conversely one may think of increasing supply in the US to lower the prices for drugs – though this obviously wouldn’t fly.

What about the demand side? How do you get Americans to demand fewer drugs. I doubt educating intoxicated drug users will have a great impact. Though it would be interesting to see what the equivalent of fair trade drugs would look like. Perhaps set up more rehab centers? Or get cocaine users to switch to other drugs – though this again is not feasible.

I don’t have a good answer for how to destroy this market. If you do, send it to the appropriate authority, I’m sure they will reward you in some way.