How Elastic is the Demand for Opium?
Not that I’m purchasing the product nor that I’m happy that production is up, but our friend Mark Thoma emailed my a link to this story. Antonio Maria Costa writes:
Annual demand for opium is approximately 4,500 tons. Last year a record 6,100 tons were produced in Afghanistan alone. That country’s production is 30 percent more than total world demand. Heroin prices should, in theory, be plummeting. But they are not. So what is going on? Does opium defy the laws of economics? Yet prices seem to be resilient. The (unweighted) national average price of dry opium at the farm gate in Afghanistan is dropping, but not significantly – it was $125 per kilo in December 2006 compared with $150 per kilo a year earlier. Prices differ across the country, not surprisingly, since Afghanistan is not a unified territory or market, even for opium. But overall, the drop in prices is modest when compared with the massive increase in opium production, 50 percent, in 2006.
Time out. When Costa says annual demand = 4500 tons, I presume he is referring to some quantity demand = quantity supplied market clearing solution at a price say of $150 per kilo. So what he is saying that is the market clearing equilibrium quantity increased by just over 35% as the price fell by almost 17% – not that quantity supplied exceeds quantity demand by 30%. If the elasticity of demand were around two, this would all make perfect sense (OK, I’ve assumed away any change in the demand schedule). So why is Mr. Costa looking for some non-standard explanation of the data he cites? OK, I don’t know what the elasticity of demand for opium is or whether there has been a shift of the demand schedule or whether some of the elaborate explanations offered by Mr. Costa have some factual basis – but apparently he doesn’t either.