Illegal Markets
Governments sometimes attempt to regulate trade by taxing certain markets or by
enforcing price floors or ceilings. Sometimes they take more dramatic measures by
passing prohibition laws that make trade illegal in certain markets. Here are some
examples of markets in which governments have attempted to enforce prohibition.
 In the 1980s a law was passed in the United States prohibiting the sale of human body
organs to transplant recipients.
 In the period from 1920 to 1933, the United States government prohibited the
purchase and sale of alcoholic beverages.
 In almost all states in the United States, it is currently illegal to sell alcoholic
beverages to minors.
 Federal and local governments in the United States (and many other countries)
prohibit the purchase and sale of certain drugs that are believed to be addictive and/or
otherwise harmful.
 In many states and countries gambling is illegal (except through state-sponsored
lotteries ) .
 In most states and localities in the United States prostitution is illegal.
 It is illegal in most countries to buy or sell animals (or body parts of animals)
belonging to endangered species.
 In the 1950s, the sale of yellow-dyed margarine was illegal in the states of Minnesota
and Wisconsin.
 In the United States and in many other countries, until relatively recently, it was
illegal to perform abortions.
 In most countries it is illegal to buy and sell children for adoption.
 In most countries, including the United States since 1863, it is illegal to buy and sell
human slaves.
Prohibition Experiment (based on Bergstrom and Miller, EXPERIMENTS IN SOCIAL DECISION-MAKING)
You are in a seedy neighborhood: it is past midnight and a cold drizzle is falling. You see three kinds of
people on the street. There are demanders, hoping to buy drugs, suppliers, hoping to sell drugs, and police,
hoping to arrest drug sellers and confiscate drugs.
This experiment concerns a partially successful government effort to suppress trade in drugs. In Session 1
of the experiment, the drug market is not illegal and there is no police interference. In Session 2, buying
and selling of drugs is illegal. The police are not able to prevent all trades, but they do manage to intercept
half of the trades made and to destroy the confiscated material. In Session 3 the drug trade is outlawed as in
Session 2, but in this session, instead of destroying the drugs that they confiscate, the police resell them to
the original buyers at prevailing market prices.
Instructions
In this experiment, some participants will be drug suppliers and some will be drug demanders. Some of the
drug demanders will be casual users and some will be addicts.
Suppliers' Instructions
In all sessions of this experiment, suppliers can produce at most two units of drugs, including drugs that are
confiscated by police. Suppliers have a Seller Cost (MWTS) of $10 for each unit that they produce. Since
each buyer can buy at most one unit of drugs, a supplier who wants to sell two units must deal with two
different buyers.
In Session 1 the drug market is free from police intervention. Each supplier can sell zero, one, or two units
of drugs. Sellers who want to sell two units must find two different buyers and fill out separate sales
contracts with each of them.
In Session 2, the police intercept half (½) of the sales contracts as they are brought to the market manager
(the instructor). In Session 2, sellers must make at least two sales before they can turn them in to the market
manager. After a seller has signed up his first buyer, he or she must find a second buyer and then turn in the
two sales contracts simultaneously. When a seller brings two contracts to the market manager, the police
will randomly select one of these contracts and confiscate the drugs that were sold with that contract.
The seller will have to pay the $10 Seller Cost for each of the two units that she sold and she will also have
to pay a $5 fine. The buyer whose contract was confiscated will not have to pay the sales price that he
agreed to pay the seller, however, he will not get the drugs either. The sale that was recorded on the
unconfiscated drug contract will go through without interference. Buyers whose contracts were seized by
the police can return to the market and try to make another deal.
In Session 3, the police confiscate drugs and fine the sellers, just as they did in Session 2, but in this session
the police resell the confiscated drugs. They will sell the confiscated item to the original buyer at the same
price that was originally contracted between buyer and seller .
Demanders' Instructions
There are two kinds of demanders in this market:

Addicts have a Buyer Value (MWTP) of $30. An addict who buys a unit of drugs for price $P will
have a profit of $30 - P. Addicts who do not buy a unit of drugs will suffer severe withdrawal systems
which result in a loss of $20.

Casua1 users have Buyer Values (MWTP) of $15. A casual user who buys a unit of drugs for price $P
will have a profit of $15 - P. A casual user who does not buy a unit of drugs will have a profit of $0.
As in previous sessions, demanders can buy either zero or one unit. In Session 2,.there is an extra
complication for demanders. Half of the sales contracts are intercepted by the police. If a buyer's contract is
intercepted, the police will tell him that his seller got caught. When this happens, the buyer does not get the
unit that he agreed to buy, but he also does not have to pay the amount that he agreed to pay on that
contract. When a contract is intercepted, the buyer is free to try to make another purchase from another
supplier.
In Session 3, half the sales are again intercepted by the police. In this session, however, when the police
seize the drugs, they do not destroy them, but simply sell them to the buyer at the price the buyer had
agreed to pay the drug dealer. The drug dealer gets no money for the confiscated drugs and has to pay a $5
fine.
Warm-up Exercise
After reading the instructions for this experiment, please check your understanding by answering the
following questions.

In Session 2 you are a supplier and you agree to sell two units of drugs, each at a price of $40. You
bring the contracts to the market manager. The police confiscate one of the units and fine you $5. You
have to pay the $10 Seller Cost for each of the two units of output. What are your total profits?

In Session 2 you are a supplier and you sell two units of drugs, one for $50 and one for $20. Your
production costs are $10 per unit and when the police catch you they make you pay a $5 fine. If the
police confiscate the unit you sold for $20, how much profit (or loss) do you make? If the police had
confiscated the unit you sold for $50, how much profit ( or loss) would you have made?

You are an addict. You have searched the marketplace and the lowest price at which you can get a unit
of drugs is $40. What would your profit ( or loss) be if you bought at $40? What would your profit (or
loss) be if you did not buy any drugs?

An addict is better off buying a unit of drugs rather than not buying any drugs, as long as the price is
lower than _______.
What Do You Expect to See?

Would you expect that making it illegal to sell a drug would cause the street price of that drug to
increase or to decrease?

Do you think that making it illegal to sell a drug would increase or decrease the amount of money
spent on this drug: by addicts? …...by casual users? …..in total?

Suppose that the police confiscated drugs whenever they caught a drug seller, but then resold the drugs
to users at the going street price. How do you think the police activity will affect the amount of drugs
consumed?
Student’s Name:
TYPE A
THE DRUG MARKET
Personal Information Sheet
Please hand in this sheet at the end of class.
Session 1
In this session you are a drug supplier. You can sell either 0, 1, or 2 units. Your Seller Cost
(MWTS) for each unit is $10. The government will not interfere with your market activities.
Record of Prices and Profits
Price of First Unit
Price of Second Unit
Total Costs
Total Profit
Session 2
In this session you are a drug supplier. You can sell either 0 or 2 units. If you sell 2 units, the
police will intercept one of them and fine you $5. You are not paid for the sale that is intercepted.
Your total costs are $25.
Record of Prices and Profits
Price in Successful Sale
Total Profit (=Sale Price - $25)
Session 3
In this session you are a drug supplier. You can sell either 0 or 2 units. If you sell 2 units, the
police will intercept one of them and fine you $5. You are not paid for the sale that is intercepted.
Your total costs are $25.
Record of Prices and Profits
Price in Successful Sale
Total Profit (=Sale Price - $25)
___________ Total Score (sum of profits from all three sessions)
Student’s Name:
TYPE B
THE DRUG MARKET
Personal Information Sheet
Please hand in this sheet at the end of class.
Session 1
In this session you are a drug addict. You find it extremely painful to go without the drug. If
you buy a unit of drugs for price P, you will have a profit (loss) of $30 – P. If you don’t buy any
drugs, you will suffer a LOSS of $20.
Record of Prices and Profits
Price
Profit (Loss)
Session 2
In this session you are a drug supplier. You can sell either 0 or 2 units. If you sell 2 units, the
police will intercept one of them and fine you $5. You are not paid for the sale that is intercepted.
Your total costs are $25.
Record of Prices and Profits
Price in Successful Sale
Total Profit (=Sale Price - $25)
Session 3
In this session you are a casual demander who enjoys but is not addicted to the drug. If you
obtain a unit of drugs, you will obtain $15 worth of benefits. If you do not buy any drugs, you
will not obtain any benefits and your profits will be $0.
Record of Prices and Profits
Price Paid
Profit (=$15 - P)
___________ Total Score (sum of profits from all three sessions)
Student’s Name:
TYPE C
THE DRUG MARKET
Personal Information Sheet
Please hand in this sheet at the end of class.
Session 1
In this session you are a casual demander who enjoys but is not addicted to the drug. If you
obtain a unit of drugs, you will obtain $15 worth of benefits. If you do not buy any drugs, you
will not obtain any benefits and your profits will be $0.
Record of Prices and Profits
Price Paid
Profit (=$15 - P)
Session 2
In this session you are a drug addict. You find it extremely painful to go without the drug. If
you buy a unit of drugs for price P, you will have a profit (loss) of $30 – P. If you don’t buy any
drugs, you will suffer a LOSS of $20.
Record of Prices and Profits
Price
Profit (Loss)
Session 3
In this session you are a drug supplier. You can sell either 0 or 2 units. If you sell 2 units, the
police will intercept one of them and fine you $5. You are not paid for the sale that is intercepted.
Your total costs are $25.
Record of Prices and Profits
Price in Successful Sale
Total Profit (=Sale Price - $25)
___________ Total Score (sum of profits from all three sessions)
Student’s Name:
TYPE D
THE DRUG MARKET
Personal Information Sheet
Please hand in this sheet at the end of class.
Session 1
In this session you are a drug supplier. You can sell either 0, 1, or 2 units. Your Seller Cost
(MWTS) for each unit is $10. The government will not interfere with your market activities.
Record of Prices and Profits
Price of First Unit
Price of Second Unit
Total Costs
Total Profit
Session 2
In this session you are a casual demander who enjoys but is not addicted to the drug. If you
obtain a unit of drugs, you will obtain $15 worth of benefits. If you do not buy any drugs, you
will not obtain any benefits and your profits will be $0.
Record of Prices and Profits
Price Paid
Profit (=$15 - P)
Session 3
In this session you are a drug addict. You find it extremely painful to go without the drug. If
you buy a unit of drugs for price P, you will have a profit (loss) of $30 – P. If you don’t buy any
drugs, you will suffer a LOSS of $20.
Record of Prices and Profits
Price
Profit (Loss)
___________ Total Score (sum of profits from all three sessions)
Sales Contract
Session:
Round:
Price:
Buyer Value:
Seller’s Name:
Buyer’s Name:
Sales Contract
Session:
Round:
Price:
Buyer Value:
Seller’s Name:
Buyer’s Name: