Ever since the beginning of the American state’s so-called war on drugs, there has been a significant increase in drug potency, which resembles the trend that occurred during alcohol prohibition in the twentieth century. However, what causes such trends?
We gain some insight from the Alchian-Allen theorem, which tells us that increases in drug potency occur in response to changes in the cost and incentive structure. Often, this is a result of drug-enforcement legislation.
The Alchian-Allen Theorem
The third law of demand, known as the Alchian-Allen theorem, states that when the price of two substitute goods is affected by an additional fixed cost, the consumer, assuming that the individual acts on the margin, will opt for the higher-quality good. Again, the key to this trend lies in the fixed cost and looking at relative prices. This theorem, therefore, can, as stated above, explain increases in the potency of drugs.
For example, consider the following to prove that the Alchian-Allen theorem can explain increases in potency of drugs: say that individuals in Florida and Virginia are in the market for apples. Further, there are two qualities, namely low- and high-quality apples; the low-quality apple is worth five dollars and the high-quality one is worth ten dollars. In addition, there are fixed transportation costs for those who live in Virginia, as these apples are produced in Florida. For the sake of simplicity, let us assume that Virginia residents face a fixed transportation cost of five dollars, which is added to the price of both low- and high-quality apples. For Virginia residents the price of a low-quality apple becomes ten dollars, whereas a high-quality apple is now fifteen dollars. It is now cheaper for residents in Virginia to buy high-quality rather than low-quality apples.1 On the margin, one would tend to see individuals purchase higher rather than lower quality apples.
The example above demonstrates that, on the margin, it is cheaper for Virginia residents to purchase higher quality apples. The key is the fixed transportation cost and looking at relative prices. This theorem can generally be applied to any good; of course, one has to assume that individuals are acting on the margin and thus would expect more benefit (or satisfaction) purchasing the higher quality (or more potent) good.