What's the cost of smoke, snort and shoot?

Economics: Drugs are big business but we don't know enough about the economics to stop the rot, writes Yvette Cooper

Tea, Coffee, cheese, bread, hummus and a spliff to go, please. According to a new report from the Home Office, 300 million drug transactions take place in the capital each year. And far from being confined to shady deals in dingy depressed corners of London, the report describes some customers picking up their hit as they enjoy a weekend shopping in the richer areas of town.

"Buyers commented that this was a very pleasant area in which to shop," says the report. "They would sometimes buy drugs while doing their weekly shopping or sit and have a coffee while waiting for a seller."

The study, by the Police Research Group, focused on six dealing sites in London. Researchers interviewed drug users, drug workers and the police to draw up a picture of the "market" in each area - because markets these are.

Under the hype, the neurosis and the glamour of drugs there are networks of buyers, sellers, distributors and producers. This is a multi-million - no multi- billion - pound industry, where prices bob up and down to balance supply and demand. But because all this buying and selling goes on underground, we have very few reliable empirical analyses of how the economics actually works. Which means, sadly, that we have few reliable studies to guide us in policy development either. We don't really know how much illegal drug use hurts our society, or whether our policies to tackle it are remotely cost effective. Nor do we have much of an idea how markets might react if policies were changed.

It is clear why people supply drugs: profit. According to the European Monitoring Centre for Drugs and Drug Addiction, the illegal drug industry is worth pounds 140bn to pounds 300bn worldwide. This week's Home Office report estimates the market is worth pounds 600m in London alone.

So long as customers are prepared to pay the price - to feed addictions or for recreation - and profit can be made, someone will get into the supply business. A retired drug enforcement officer in New York once described to me the economic incentives for teenagers in Harlem: "They can make a hundred bucks just sitting on the street corner as a lookout. What chance do they have of earning that kind of money in a legitimate job in an afternoon?"

In some areas, the business is becoming more competitive. The Home Office report says that in poor, multi-ethnic inner- city areas the white, Asian and West Indian dealers vie to provide narcotics. In a legal and regulated industry, such competition would be expected to push prices down. In the illegal underworld, however, it is just as likely to push violence up.

Of course there's a huge risk involved at every stage in the game, and that's why prices are so high.

The market is heavily segmented. Ordinary teenagers who pop an ecstasy tablet are a far cry from the city slickers who snort cocaine during the weekend, who themselves are a long way from the Glasgow heroin junkies spread across our screens in Trainspotting. Indeed, many of these drug users may do themselves and their society no direct harm at all.

But others do. Which is why the rest of society feels the need to intervene between these consumers and their suppliers. Illegal drug abuse imposes significant costs on those who never directly participate in the puffing, snorting or shooting up - through crime, treatment and law enforcement. But we don't know how great these costs really are. Police reckon around 10 per cent of the burglars they catch in London are committing crimes to buy drugs. Eleven per cent of sentenced male prisoners are known to have been dependent on drugs at the time they were imprisoned.

Add to this the fear that those who become addicted to hard drugs are often young people, preyed on by unscrupulous dealers, unaware of the true costs of their decisions. In other words, these are not well- informed consumers making decisions and taking responsibility for them; they are vulnerable people who get addicted and so lose full control over their decision-making in future.

The case for some kind of intervention is clear. Less clear is whether we are getting the current policy balance right.

Richard Stevenson of Liverpool University believes we are not. In a pamphlet for the Institute for Economic Affairs a few years ago, he argued that the cost to society of the current system is far higher than the costs of legalising all drugs. Mr Stevenson is even more determined today, arguing that "the current system is just not working." Keeping drugs illegal, so the argument goes, pushes up the price, gives addicts an incentive to steal, draws users into an underground world, increases the health risk and, of course, pushes up the cost of law enforcement.

But others fear that legalisation would increase drug use and abuse, leading more people into addiction. Legalisation would push down the price of drugs. And if prices fall, use goes up. United States economists Henry Saffer and Frank Chaloupka studied the effect of price on drug use across US states between 1988 and 1991. They were interested to know whether demand was roughly constant, whatever the price - in economists' terms "inelastic". They discovered not.

They claim, on the basis of previous research, that legalisation would lead roughly to a 60 per cent drop in the retail price of heroin and cocaine. On their figures, that would mean an increase in the number of occasional heroin users of 54 per cent and in occasional cocaine users of 33 per cent. But their study also showed that regular users are less responsive to price, so it isn't at all clear what impact legalisation would have on the number of heavy drug users - the ones that we should be worried about.

Mr Stevenson concedes that drug use would go up, but says it's a matter of weighing the costs and benefits. The trouble is that these costs and benefits all remain so unclear; the economic case either way remains unproven.

In the meantime, however, there are cost-effective changes in policy that make sense. The Shadow Home Secretary, Jack Straw, argued last year for new treatment programmes for addicts who end up in the criminal justice system.

Experiments in the US have shown that directing addicts from the courts into treatment programmes can reduce recidivism, and so reduce the future cost to society of crime.

In the absence of reliable evidence about the real costs or benefits of more radical change, such pragmatic policies are a sensible way forward.