Demand Elasticity

"When the price of an illicit drug changes, the quantity consumed by existing users may change and the total number of users may also respond. The percentage change in total consumption resulting from a 1 percent change in price is referred to as the demand elasticity. For cocaine and cannabis, the elasticity of demand has been estimated at around -0.5, indicating that demand falls by 0.5 percent when price increases by 1 percent.15 This elasticity is similar to that observed for tobacco and implies that a price increase more than compensates for the reduction in demand and results in higher overall drug revenues. There are fewer studies for heroin, but a reasonable estimate for elasticity appears to be around -0.3.16 For methamphetamine, a successful U.S. government effort to reduce the supply of precursor chemicals led the price of the drug to temporarily triple and the purity to decline from 90 percent to 20 percent.17 Simultaneously, amphetamine-related hospital admissions dropped by 50 percent, and use among arrestees declined by 55 percent. However, these indicators returned to their previous levels within four months as prices fell and purity increased."


Organization of American States, "The Drug Problem in the Americas: Studies: Chapter 4: The Economics of Drug Trafficking," 2013, pp. 12-13.