An interesting application of supply and demand to addictive substances compares alternative techniques for supply restriction. For this problem, assume that the demand for addictive substances is inelastic.
a. One approach (used today for heroin and cocaine and for alcohol during Prohibition) is to reduce supply at the nation's borders. Show how this raises price and increases the total income of the suppliers in the drug industry.
b. An alternative approach (followed today for tobacco and alcohol) is to tax the goods heavily.
Using the tax apparatus developed in Chapter 4, show how this reduces the total income of the suppliers in the drug industry.
c. Comment on the difference between the two approaches.