Economies of Scale in the Cocaine Industry

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Brian Palmer of Slate reports that cocaine prices have dropped significantly in the past three decades due to economies of scale. As drug traffickers have become more organized (in processing, transport, and retail networks), the price of cocaine has plunged:

Since [the end of the 1980s], the price has dropped more slowly, down to approximately $140 for a gram of pure cocaine in 2007. (That’s almost 80 percent less than it cost in 1982.) Some of the continued decline is attributable to increased production and softening demand, but a large component likely has to do with changes on the retail end. According to figures compiled by Jonathan P. Caulkins of Carnegie Mellon University and Peter Reuter of the University of Maryland, around 33 percent of the price of cocaine went toward compensating smugglers and dealers for the risk of violence in 1990.

Technology is another factor in reducing transaction costs, and Palmer writes that “enforcement of drug laws has added substantially to the cost of street drugs, but those increases haven’t been enough to outpace efficiency gains in the industry.”