The economics of the war on illegal drug production and trafficking

• This paper develops a model the war on drugs in source countries.
• We use the model to study Plan Colombia, a large scale intervention in Colombia aimed at reducing the supply of cocaine.
• The model fits many of the patterns found in the data and sheds light on certain puzzling findings.
• According to our results, policies aimed at targeting the initial stages of illicit drug production are relatively ineffective (and costly) when compared to policies targeted at higher stages.

We model the war on drugs in source countries as a conflict over scarce inputs in successive levels of the production and trafficking chain, and study how policies aimed at different stages affect prices and quantities in upstream and downstream markets. We use the model to study Plan Colombia, a large intervention aimed at reducing the downstream supply of cocaine by targeting illicit crops and blocking the transport of cocaine outside this source country. The model fits the main patterns found in the data, including the displacement of the drug trade to other source countries, the increase in coca crops’ productivity as a response to eradication, and the lack of apparent effects in consumer markets. We use a reasonable parametrization of our model to evaluate the cost-effectiveness of different policies implemented under Plan Colombia. We find that the marginal cost to the U.S. of reducing cocaine transacted in retail markets by one kilogram is $940,000, if it subsidizes eradication efforts; and $175,000, if it subsidizes interdiction efforts in Colombia.