Abstract
In this paper, we extend the optimal law enforcement model to the illegal trade and consumption of narcotics. Three sources of risk in the narcotic business are considered: (1) The consumer can be detected while consuming narcotics; (2) the consumer and the retailer can be detected at the time of sale to the consumer; and (3) the retailer and the producer can be detected at the time of sale to the retailer. We derive the two levels of market equilibrium and a set of comparative static results. The welfare analysis is used to comment on the Schengen Agreements and the implications for the market of narcotics.
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