The optimal price of heroin: more of less prohibition?

Heroin has been a prohibited substance in Australia since the early 1950s. Prohibition, combined with a continued demand for the drug, has spawned a profitable black market. This paper presents a framework for evaluating the net welfare effects of heroin consumption under prohibition, a task made more difficult because of the co-existence of addicts and casual users. It is assumed that both groups enjoy positive net benefits from their heroin consumption, but the former impose external costs which derive from their addiction. Prohibition reduces heroin addiction but also the surpluses of both groups. Furthermore, whilst prohibition may reduce quantity related social costs, it may increase price related social costs.