Tuesday, September 28, 2010
A Question From the Crowd:
One of your colleagues emails this question, which I try to answer:
Q: You mentioned that last night you agreed with legalizing prostitution and drugs. I understand your reasoning but I had a quick question. I have yet to make a decision on those matters. Sure, the quality of those illegal goods would be better (purer drugs with less harmful substances and less vd in brothels) but wouldn't the quantity increase? If that is the case, wouldn't the question be between fewer low quality drugs/prostitutes or higher quality drugs/prostitutes. Or is that over simplifying the matter at hand. (I do understand that there will always be prostitution and drugs no matter what the government tries to do)
Does that make sense?
A: On this one I had to get out paper and pencil and draw the graph. Hehe! You should do this, too.
Draw a supply and demand graph.
Now show a second supply curve, to the left of the original supply curve.
The first curve was the un-regulated market for prostitutes.
The second curve shows the new equilibrium quantity and price for prostitutes.
The cost of evading the police is what forced the Supply curve inward (upward).
Consumer surplus has gotten smaller.
Price has risen.
Quantity has fallen.
There is a deadweight loss triangle.
Some of the previous consumer surplus is now being spent evading the police.
Some of the previous producer surplus is now spent evading the police.
But: The police don't have to be evaded if they can be paid, and if pimps can pay the police, then they might not have to pay them the full amount of the costs, so they get to keep some money derived from higher prices for themselves.
Also: The pimps get this money, not the prostitutes. The pimps are necessary because they have a comparative advantage in dealing with the police, while prostitutes are not as good at dealing with the police.
If prostitution were legal, there would be no need for police-relations specialists. Instead of working for pimps, prostitutes would hire off-duty cops to work security for them.
So, basically you are right. With prostitution legalized, there will be more prostitution.
Whether this is normatively good or bad economics does not say.
But, with prostitution legalized pimps are out of business, as are human traffickers.
The proceeds (surpluses) are all split between the prostitutes and their clients.
There is less abuse of prostitutes.
The incentives to enslave young and helpless people to sell for sex are removed.
You might draw another graph, the market for pimps.
When prostitution is made illegal the demand for pimps increases dramatically.
Pimping is then a complimentary good (or a factor of production) for the market for prostitutes, which is what pushes the supply curve inward in the market for prostitution.
Legalizing prostitution eliminates the market for pimps, and the force pushing the supply curve inward in the market for prostitution.