QUANTITATIVE RESTRICTIONS ON THE FLOW OF NARCOTICS: SUPPLY AND DEMAND RESTRAINTS IN A NORTH-SOUTH MACRO-MODEL

This paper constructs a macroeconomic model of North-South interaction where the flow of narcotics from the South to the North is restricted. The economic effects are akin to quantitative restrictions in trade policy. Two alternative policy scenarios will be considered. One involves reducing the supply of drugs at the source, accompanied by aid. Supply-side restrictions have negative aggregate supply-side effects in the producing region, because of the monopoly rents generated from that type of control. This makes them a second-best policy, particularly if the accompanying aid is not used for poverty alleviation and fails to expand domestic aggregate demand. Alternatively, demand side restrictions will be found to be superior.