The economics of prohibition

I don't know quite what to make of this. It's pretty weird. I thought at first it might be a hoax of some kind but it checks out. This is really The Federal Reserve Bank of Minneapolis' Annual Student Essay Contest. This year's subject is “What economic lessons can be drawn from this picture of an illegal drug deal?” And the background info is sensible.

As this picture illustrates, however, making a product illegal does not eliminate the market for it. The Office of National Drug Control Policy estimates that Americans spent about $65 billion on illegal drugs in 2000, more than the amount spent on cigarettes. Worldwide, the drug business is worth about $400 billion. Drugs are also a big concern to politicians, with government spending an estimated $40 billion to $60 billion annually to fight the “war on drugs.”

Potential profits from selling drugs have led to violent crime in America’s inner cities and elsewhere, causing some to ask whether there is a better way to address the problem.

Some have proposed tougher enforcement. Others have suggested moving away from a criminal law strategy toward a public health approach, and still others have proposed legalizing drugs altogether.

These are emotionally charged and controversial issues, but perhaps by taking the cool view of an economist we can gain some perspective. Fundamental concepts, such as externalities, cost-benefit analysis and black market economics, can shed light on policies and individual behavior related to illegal drugs.

It strikes me as rather a brilliant topic presented in a fairly neutral light. I can't wait to read the winning essay.

[hat tip to JackL]