South-Western College Publishing - Economics  
Heroin Still a Strong Market in Some Parts of the World
Topic Product Markets
Key Words opium, heroin, Afghanistan, government, regulation, profits
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Reference ID: A165784820

News Story The trade in opium, the main ingredient in production of heroin is remaining stable in Afghanistan, despite the governmentís attempts to reduce the trade. Nowhere else is the market as concentrated than in Helmand province, which produces over half of the total in Afghanistan, which produces 92% of the global supply. And it appears that there will be another record crop this year.

While more and more of the raw product is intercepted by the government, suppliers are seeking to make the heroin purer, using more efficient means of production. That keeps a stable supply. Demand for opiates globally has remained stable as well. As a result, the price for farmers of poppies, the plants that are used to produce opium, has remained remarkably stable over the last few years.

And thatís part of the problem. As the government tries to induce farmers to produce less opium, the fact remains that farmers can get up to eight or nine times as much for opium crop than for wheat.

Further, others beyond farmers have an interest in keeping the illicit trade moving. Policemen, typically poorly paid, are used to taking bribes for looking the other way with opium production. Other members of government are similarly bribed.

The government has tried different ways of reducing the poppy crop. Aerial spraying is the method favored by the US government, but this could create significant backlash against the Afghan government. Encouraging alternative methods of development is another strategy, including licensing the legal production of opium for painkillers. Guaranteeing prices for other crops is another method, but could encourage smuggling, and given the relative prices of opium and wheat, a guaranteed price program could become prohibitively expensive for the Afghan government. Whatever the method, stemming the production of heroin will be no easy feat, when farmers are so used to producing poppies.

Discussion Questions:
1. Use a graph of supply/demand in the market for opium to indicate what is happening to the price of opium.
2. Suppose the government were to induce farmers to produce wheat by guaranteeing them a price to produce it. How high would that price have to be, in relative terms?
3. In a graph of supply and demand for poppies, indicate consumer and producer surplus. Where does a bribe occur on this graph? Draw it, along with the new consumer/producer surplus after the bribe.
Multiple Choice/True False Questions:
1. True/False. According to the information in the summary, if an opium farmerís only alternative to producing poppies is to produce wheat, it must be the case that the farmerís economic profit is greater than his/her accounting profit.
2. If the price of opium has remained roughly constant, it must be the case that
  1. Supply is rising faster than demand.
  2. Supply is rising more slowly than demand.
  3. Supply is rising at the same rate as demand.
  4. Supply is falling at the same rate as demand.
3. Since the price to farmers has been roughly constant, bribing public officials to maintain opium production in Afghanistan will ____________ producer surplus.
  1. Increase
  2. Decrease
  3. Not change
  4. Not enough information to answer the question.
Source "The Wellness Boom." The Economist. January 4, 2007.
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