The Political Economy Review 2017

The war has had negative externalities in both consumption and production. The biggest problem that Mexico faces is negative externalities in production: the biggest consumer of drugs is actually the USA. The USA has pledged $1.5bn over a three-year period to fortify its border, prevent the drugs trade and consequently reduce the consumption of the drugs on US soil. The Mexican government has a hard task in stemming the production of drugs as sites are well-

Great economic costs have meant that the war on drugs has proved unpopular with many in Mexico

hidden and spaced out over various locations, and the people working at these sites are often committed to the cause either through loyalty or fear. Such cartels often kidnap and murder when they suspect disloyalty from anyone employed by them, and innocent people get caught up in this vicious cycle, usually due to the lack of suitable employment elsewhere. The cartels often pay better than the government for similar jobs and this affects the economy as it takes away labour resources. They also don’t get charged tax for their wages which means the government loses out on funds which it could use to complete their political goals. One way in which the Mexican government can try to combat the problems they face from drugs would be to legalize them. The cost of the war on drugs has dropped significantly since its highest point in 2011, as shown below, but it is still shockingly high. Since the drugs market is a black market, the government misses out on a gigantic industry and missed tax opportunity is one of the biggest reasons that people campaign for the legalisation of some drugs. Trafficking is a lucrative business for the cartels, bringing in an estimated annual revenue of $45 billion for Mexico, with an 80% profit margin. This leads to roughly $32bn in profits, most of which is then re-invested into legitimate Mexican businesses in order to try to ‘wash’ the money and minimise the risk of government seizure. This money can then be reused in the economy which helps stimulate growth in the Mexican economy by keeping a steady injection into the circular flow of income. Such profits mean that if the drugs were legalised, many more competitors would add increased competition to the market, lowering the price of drugs, and making the business less lucrative to the cartels. This would not only help to reduce crime as the cartels would have less power, but also increase the revenue that the government makes through taxes whilst freeing up more funds to spend on the fight. The money that the government would receive from taxes could be spent in dealing with the negative externalities in both production and consumption and keeping the trade at the socially optimum level. If the market continues to provide the sort of revenue that it is currently providing for the cartels, the legalisation of drugs would sort out many problems that the government has in regards to the drugs trade and cartels.



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