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Why Do Weak States Prefer Prohibition to Taxation?

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Political Economy of Institutions, Democracy and Voting

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Abstract

Why do weak states prefer prohibition to taxation? Desierto and Nye show that keeping an undesirable good illegal is more efficient than legalizing and taxing it, even if producers of the prohibited goods pay out large bribes to prohibition enforcers. If the bribes are recognized as revenues to the enforcers, this additional benefit keeps welfare losses small. This chapter further supports this finding with preliminary empirical evidence and graphical analyses of the likely net welfare losses from prohibition and taxation. It provides a positive rationale for the preference for prohibition in states prone to corruption and imperfect enforcement.

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Notes

  1. 1.

    Desierto and Nye, however, make the bribe amount explicit, by assuming that a fixed fraction β of total AC are in the form of bribes. This fraction captures the overall extent of corruption in the environment, as it is the permissible level at which enforcers can extract a bribe without being detected by the government.

  2. 2.

    With B q  > 0, it is always the case that (V q  − B q ) is less than, or below, V q . In Figs. 2 and 3, the (V q  − B q ) line has roughly the same slope as the V q line, but this is not necessarily the case. While the (V q  − B q ) line cannot be flatter than V q (i.e. they cannot intersect), it can be steeper. This can happen if Bq is more sensitive to output changes than V q – that is, if deriving bribe benefits is more costly than enjoying 'legitimate' consumption. In this case, the result is stronger, since area d would be smaller, and area c larger.

  3. 3.

    Or, to state it analogously with the previous subsection: to the right of Qu, V q is falling faster than MR, so it is not socially optimal to increase quantity further. To the left of Qu, V q is rising faster than MR, so it is not optimal to decrease quantity.

  4. 4.

    Recall that in Fig. 4, area g is lost when the optimal consumption level is Qu. If optimal consumption were less than this, the loss would be greater than g.

  5. 5.

    Glaeser and Shleifer (2001) similarly note that its easier for an enforcer to detect possession of an illegal good than to verify whether taxes (on a legal good) have been paid.

  6. 6.

    See Appendix for details.

  7. 7.

    CPI scores reflect “political stability, long-established conflict-of-interest regulations and solid, functioning public institutions”.

  8. 8.

    Of course, there are many reasons why such association between the extent of corruption and the strength of prohibition might not be truly causal. For instance, developing countries that tend to be more corrupt might also have less liberal attitudes towards drugs, prostitution and gambling.

References

  • Becker GS, Murphy KM, Grossman M (2006) The market for illegal goods: the case of drugs. J \Polit Econ 114(1):38–60

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  • Miron JA (2004) Drug war crimes: the consequences of prohibition. Independent Inst, Oakland, CA

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  • Miron JA (2008) The budgetary implications of drug prohibition. Report for the criminal justice policy foundation and law enforcement against prohibition, Maryland

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Acknowledgments

We thank Norman Schofield, Kenneth Shepsle, Alex Tabarrok, John Nachbar, Alex Possajennikov, Emmanuel De Dios, Raul Fabella, and an anonymous referee for their comments and suggestions, and Karen Annette D. Lazaro for research assistance.

Author information

Authors and Affiliations

  1. School of Economics, University of the Philippines, Diliman, Quezon City, 1101, Philippines

    Desiree A. Desierto

  2. Economics Department, George Mason University, Carow Hall MSN 1D3, 4400, University Drive, Fairfax, VA, 22030, USA

    John V. C. Nye

Authors
  1. Desiree A. Desierto
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  2. John V. C. Nye
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Correspondence to Desiree A. Desierto .

Editor information

Editors and Affiliations

  1. Center in Political Economy, Washington University in St.-Louis, Brookings Drive 1, Saint Louis, 63130, Missouri, USA

    Norman Schofield

  2. , Faculty of Economics, University of Vigo, Lagoas Marcosende, Vigo, 36310, Spain

    Gonzalo Caballero

Appendix

Appendix

+Some form of partial prohibition.

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Table 4
Full size table

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Desierto, D.A., Nye, J.V.C. (2011). Why Do Weak States Prefer Prohibition to Taxation?. In: Schofield, N., Caballero, G. (eds) Political Economy of Institutions, Democracy and Voting. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-19519-8_4

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