South-Western College Publishing - Economics  
Coca Leaf Prices Reach a High
Subject Comparative statics
Topic Supply and Demand/Equilibrium
Key Words Price, supplies, incentive
News Story

Peru is a major coca leaf producing country. Coca leaves are a fundamental ingredient in making cocaine. In 1995, the Peruvian Government shot down a number of planes that were suspected of trafficking drugs, and intercepted others. This caused the price of coca leaf to fall by 60 percent. This policy was reinforced by educating farmers about how to grow alternative crops, and by the building of roads to take those crops to market. Many farmers swore not to grow coca again.

Since March 1998, the price of coca has risen again, regaining two-thirds of the initial reduction in price. The use of coca in Peru has increased, Bolivian supplies have been scaled back, and trafficking has been re-established through new routes. As a result, the farmers in Peru have more incentive to restart growing coca leaf.

Not surprisingly, the Peruvian Government is stepping up its interdiction efforts, with the help of U.S. aid.

(Updated November 1, 1999)

Questions
1. Draw a diagram of the market for Peruvian coca leaf in early 1995. Mark the equilibrium price and quantity.
  a. Which curve was affected the campaign by the Government of shooting down the planes of traffickers? Explain.
  b. What happened to the equilibrium price and quantity of coca leaf traded as a result?
2. After this, farmers were encouraged to grow alternative crops.
  a. Which curve was affected by this policy? Explain.
  b. Illustrate and explain the effect on the market for coca leaf in a second diagram.
3. Recently, greater Peruvian use of cocaine has been seen and new routes for traffickers have emerged. In a further diagram of the market for coca leaf, show what has happened to the equilibrium price and quantity.
Source Clifford Krauss, "Peru's Drug Successes Erode as Traffickers Adapt," The New York Times, August 19, 1999.

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