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Long Run Profit

You might not know this, but the more successful authorities are at restricting the supply of drugs the richer drug dealers will become and the more money will get spent on drugs overall.

This assertion might seem illogical but it’s actually based on two very simple economic principles called demand elasticity, and the law of supply and demand.

If a good has a high demand elasticity, this means that as the price for the good rises, the amount of the good that people demand decreases by a higher percentage than the increase in price. So for example, if I raise the price of a good (lets say luxury yachts) by 10%, people might demand 20% less luxury yachts. For goods with a high demand elasticity, increasing the amount that the government taxes them will actually result in less tax revenue, which is why pretty much all governments have abandoned the idea of a luxury goods tax.

For goods with a low demand elasticity, the opposite applies. Take medicine for example: if you are dying, you need medicine, no matter how much it costs, so even if the government makes medicine more expensive you will still need the same amount of it. For goods with a low demand elasticity, raising the price by 10% might only lower the amount demanded by 5%. Governments love taxing these types of goods to raise revenue, which is why you always see cigarette, alcohol and gambling taxes increasing year by year.

Now the law of supply and demand states that price is the intersection between the people who are buying a good and the people that are supplying it, and that decreasing the supply of a good will raise it’s price (because more people will want to buy than sell, so buyers will compete with each other by offering more money). Increasing the supply of a good will conversely lower it’s price (because more people will want to sell than buy, so the sellers will compete with each other by lowering their prices). This law of supply and demand is what controls the price of Bitcoins for example, if more people want to buy bitcoins than sell them, the price will go up, and if more people want to sell bitcoins than buy them, the price will go down.

So how does this correlate to the first assertion that I made at the start of this article? Well, it’s simple really: virtually all drugs have an EXTREMELY low demand elasticity. This means that the price of most drugs will have to go up significantly before users will start demanding less (or switch to other more available substitutes).

So basically, if the police crack down on the supply of drugs by arresting a large amount of dealers and manage to reduce the amount of drugs that is available on the streets, the prices will go up. However, because the demand elasticity for drugs is low, people will still want to buy almost the same amount of drugs. Therefore, users will actually spend MORE money on drugs which means that drug dealers will make more money than they did before.

What happens next is simple economics as well. People who aren’t currently selling drugs but are inclined towards entrepreneurial action will notice there is now a huge amount of profit to be made, so they will start supplying the users themselves. This will increase the supply again which will drive down the price. This will keep happening until the price is back to where it was before the police had their crackdown and arrested all the dealers.

So yes, any intelligent economist will be able to tell you the drug war is a completely futile one that will have no long term effect on the amount of people buying and selling drugs, but if you are reading this article I probably don’t have to convince you of this fact.

How does this relate to online darknet marketplaces? Well, what we have seen in the last few years is the introduction of websites that allow drug dealers from all around the world to sell to customers all around the world, with almost no startup costs. Basically, anyone who can get a steady supply of good quality drugs can sell them to anyone else, anywhere in the world. This is what economists call reduced barriers to entry and exit.

This spells extremely bad news for drug dealers, we are fast approaching a time when if you want to sell drugs you will be competing for profit with every single other dealer in your country, and if we are talking about the international market, the entire world. Every time there is someone who can source a drug for cheaper than another person, they now have an incentive to begin selling.

When there is profit to be made both above the cost of your time, and above the cost of producing a good or supplying a service, this is called economic profit. In any competitive market over the long term, suppliers will continue entering the market until economic profit equals zero. When economic profit reaches zero people are only making the value of their time invested and production costs, and no more (economists call this accounting profit). If at any point economic profit drops below zero (and everyone is making a loss), suppliers will leave the market until it is back to zero. So in a free market, profit (above the value of your time and production cost) always finds its way to nothing due to people entering the market when there is profit to be made and leaving it when they are making a loss. If profit exist, it means that the market isn’t competitive enough or there are too many barriers to entry and exit.

We have seen this in countries that have legalized weed, the weed growers and suppliers multiply so fast that profit plummets, and they start making profits that are more in line with suppliers of other legal goods. The government profits of course, due to tax revenue, but the dealers find themselves in a position where selling drugs is no more profitable than other avenues of employment. The more relaxed the marijuana laws are, the less profit is made by individual suppliers.

What will this mean for the future of the darknet marketplaces? Well, if you are a buyer, it’s great news! As darknet marketplaces gain popularity and attract more suppliers, prices will go down and quality will go up. If you are a seller, it means that unless you can source a cheaper and higher quality supply than almost everyone else in the world your chances of becoming rich are diminishing with each passing year. If you are the government, you are missing out on a massive potential source of tax revenue that is growing exponentially.

Will we see an age where drug dealers no longer live in mansions and drive flashy cars? Maybe not soon, but I believe it will have to happen eventually. And not because of the success of the war on drugs, but because of the growing popularity of online darknet marketplaces.

We live in exciting times!

2 comments

  1. The argument economics provides us is useful, but ignores much. When tolerant drug policies are commonplace, black markets will still thrive. Business activities fluctuate in many directions and dimensions. Market forces that exist will challenge the shape of business, no matter what the current climate looks like. Dark Markets are good for everyone. Anyone can gain some level of acceptance, and learn the truth about the forbidden. More importantly, buyers and sellers will form relationships. The cornerstone of profit.

  2. This is a real story and was not a metaphor or something.
    He is completely crazy.

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