ABSTRACT
The economic analysis of ‘bads’, such as illicit drugs, alcohol in prohibition in the United States and Islamic countries, and the proliferation of weapons of mass destruction, shares many features with the more standard economic analysis of goods. In both, it is important to identify the forces that drive demand and supply and thus determine price and quantity. However, whereas with goods, the focus is on ensuring that supply equals demand at reasonable prices, with bads, the focus is on acting on demand or supply to ensure that price is high (for example through taxes on alcohol and tobacco) and quantity is low. As a result, things that are regarded as problems in goods markets (for example, monopoly or cartels, excessively high prices or inadequate supply) tend to be regarded as solutions in bads’ markets. Brzoska (2003) discusses taxation of the arms trade, Becker, Murphy and Grossman (2004) the more general economic theory of illegal goods.
