Economics of the Opioid Crisis

Rationality in the opioid market

It is no lie to say that the drug problem facing America right now is of pandemic proportions. With an estimated 2.1 million individuals facing opioid problems, drug use in the U.S. is far higher than other OECD nations to the point that drug overdose has overtaken traffic fatalities as the leading cause of accidental death. Driving this issue is the abuse of prescription and non-prescription opioids. The origins of the issue are up for debate, with many experts citing the the high propensity of heroin available in Vietnam during the war as a catalyst for the issue, with thousands of troops coming home addicted to the drug. Others would suggest a 1980 letter written by Dr. Jane Porter, in the New England Journal of Medicine, which hailed opioids as an effective and non-addictive pain killer, when she stated:

Although there were 11,882 patients who received at least one narcotic preparation, there were only four cases of reasonably well documented addiction in patients who had no history of addiction. The addiction was considered major in only one instance. The drugs implicated were meperidine in two patients, Percodan in one, and hydromorphone in one. We conclude that despite widespread use of narcotic drugs in hospitals, the development of addiction is rare in medical patients with no history of addiction.

More contemporarily, the introduction of the synthetic opioid Fentanyl, which is 100 times more potent than heroin, is believed by many to be the cause of an increase in the death rate of opioid addicts. In any case, the 33,091 deaths that occurred in 2015 (15.5% higher than in 2014) indicating that current efforts to fight the plague are not effective. What makes this issue unique is not the high rate of abuse but rather the fact that the starting locus of abuse isn’t street drugs but is rather prescription medications, with 4 in 5 opioid abusers becoming addicted to the drug. With studies citing pill mills, unemployment, and decreases in the price of heroin as potential causes of the problem, it is important to first consider the geographic cartographies of abuse. According to epidemiological studies, the crisis has historically been centered around Appalachia, Florida, and poor areas of the West coast; we are now seeing that it is spreading from those areas to other parts of the nation, particularly in rural and poor areas.

Experts still remain puzzled as to why opioid use has increased at such an exponential rate. Many would contend that this question is not answerable given the irrationality of illicit substance abuse however, the basis of contemporary economic ideology rests upon the idea of Homo Economicus or the Economic Man. This rational framework assumes that the rational person (which we all are) is able to perform cost-benefit analysis, knows their tastes and preferences, and considers long-run vs. short-run desires in the decision making process. While several of these traits are shot down as soon as we consider the long-term effects of drug use, if we combine the notion of the Economic man with a framework of behavioral economics, whereby we are able to consider the discounting of present rewards relative to future reward, as well as the nuances of impulsive behaviors, we are able to have a better understanding of this seemingly non-economically sound practice of drug abuse.

With that under consideration, drug users do in fact partake in rational purchasing decisions. According to a study produced by Dr. Todd Olmsted of UT Austin, heroin and more importantly, heroin users, respond to pricing in a manner similar to a consumer of any other commodity. Dr. Olmsted took data from street prices of heroin while simultaneously looking at the consumption by consumers and discovered that heroin has a price elasticity of demand of -0.80, which indicated an inverse relationship between price and demand. In simpler terms, there is an inverse relationship between heroin use and heroin demand. Similar to heroin, tobacco products have a price elasticity of -0.48 where an increase in price sees a decrease in consumption. Thus, while the long-run outcome of illicit substance use is irrational, the consumer response to price changes is indeed rational and follows conventions of market forces.

Socioeconomic variables in the opioid industry

At this point, one may conclude that the industry for illicit opioids is just like that of any other commodity, in that market forces dictate the success of the industry. Upon examining the socioeconomic breakdown of the consumers, it becomes clear that the issue is more complex. According to the National Bureau of Economic Research, in a survey of 35 Appalachia counties, with known high propensity of heroin use, as unemployment increases by 1%, there is a 3.6% increase in opioid-related deaths and a 7.07% increase in Emergency Room visits for opioid-related health crises. This positive relationship between socioeconomic status and illicit drug use is not only indicative of the disproportionate impact that opioids have on low-income communities but more importantly it tells us about how the marginal rate of substitution of consumers change when faced with circumstances of unemployment. According to this data, opioids are likely an inferior good, as the quantity demanded increases as consumer income decreases. Thus, we find that illicit opioid use is responsive to markets, not as a normal good but as a good associated with affordability. This claim is supported by a study performed by Dr. Alejandro Badel of the Bureau of Labor Statistics which suggested that:

Those who are unemployed or otherwise out of the labor force may face financial hardship or simply have more unstructured time, either of which can result in a higher propensity to consume these substances, everything else held constant.

Clearly the rate of opioid consumption cannot be traced to a single dependent variable but is instead influenced by poor socioeconomic conditions. Though there is a high-degree of heterogeneity in the factors that contribute to opioid use and addiction, all available evidence suggests that increased availability, pricing, and present employment status are key factors that impact the choice to abuse opioids.

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