Optimal law enforcement and the economics of the drug market: Some comments on the Schengen Agreements

In this paper, we extend the optimal law enforcement model to the illegal trade and consumption of narcotics. Three sources of risk in the narcotic business are considered: (1) The consumer can be detected while consuming narcotics; (2) the consumer and the retailer can be detected at the time of sale to the consumer; and (3) the retailer and the producer can be detected at the time of sale to the retailer. We derive the two levels of market equilibrium and a set of comparative static results. The welfare analysis is used to comment on the Schengen Agreements and the implications for the market of narcotics.