What Economics Reveals About Illegal Drug Markets

 

Buying drugs is like a bag of Revels, you never know what you’re gonna get! It may be the real deal, or maybe it’s washing powder and rat poison. We will explore why this happens and explain market failures within the drugs market, like asymmetric information, moral hazards and externalities.

 

Secret ingredients in drugs: not love

Illicit drug markets famously experience a mismatch in information visibility, where limited buyer knowledge results in predatory tactics from sellers (Neuberger et al, 2017). Economists refer to this as asymmetric information, meaning that many drug users end up inhaling the same thing they use to wash their clothes (Maurice, 2024).

Studies have found that purity rates of Cocaine are as low as 30% (Peck et al., 2019). A race to the bottom occurs, where high-quality sellers are pushed out of the market, and users are taking more risks than ever.

The inevitable result is adverse selection – better known as the “lemons problem” modelled by George Akerlof. Simply put, as users cannot observe drug quality, they assume the worst. This means sellers of high-quality substances cannot charge higher prices due to buyer’s suspicions of receiving an £80 bag of flour. Buyers seek high-quality drugs but cannot distinguish quality, lowering expectations and willingness to pay. The result? Pure drugs are pushed out of the market as buyers are not willing to pay premium prices (Ben Lakhdar et al., 2013). To answer the government’s question of why drug deaths rise each year (GOV.UK, 2025), look no further than economics!

(Seven jailed for plot to supply Class A drugs in West Yorkshire, 2025)

 

Are drug dealers untouchable?

Economists explain this behaviour through moral hazard - where individuals take more risks when they do not bear the full costs of their actions. Are there any consequences of selling contaminated drugs for the sellers? No, the health risks are pushed onto the buyers, meaning riskier behaviour is actually incentivized. Cutting substances with cheap mystery ingredients easily boosts profit, so there is little incentive to keep the drugs pure.

Interestingly, this problem reduces on digital drug platforms as they have reviewing systems, similar to EBay (Galenianos et al, 2017). In economics, this is a type of market signalling, which gives buyers more indication of quality and holds sellers more accountable.

 

Highs and Harms: who really pays the price?

So, what happens when, in the best case no one really knows what they are buying and in the worst case, sellers do not even know what they are selling?

Unsurprisingly none of the adulterants used in drugs count towards your 5 a day. The harsh reality is that low-quality products pose serious private costs (Health, P., 2025). When drug purity is uncertain users are exposed to unpredictable dosages - one batch may be weak and the next dangerously strong.

This combination of unknown potency and dangerous additives creates an environment where overdose risk is significantly heightened, turning consumption into a gamble with potentially fatal outcomes.

The consequences do not end with the transaction; they spill over into society creating negative externalities, which represent the cost on society and is faced by those outside the transaction.

Perhaps the most significant negative externality is crime. With the absence of legal enforcement, black markets cannot rely on contracts or courts. Alternatively, violence and gang activity become key mechanisms for protecting transactions, settling disagreements and competing for market share.

Then there is the growing burden on the NHS. Whilst overdoses exist in all drug markets the increased risk caused by unpredictable purity and harmful chemicals directly translates into increased healthcare costs, which is bad news for the taxpayer.

Here is where it gets interesting, none of this is reflected in the price. From an economics perspective the market is sending the wrong signal. Users pay for the product whilst the cost of the wider damage is dumped on society. Naturally, when prices are artificially too low consumption is higher than what is best for society.

The illicit nature of the drugs market leaves the governments with their hands tied behind their back as they rely on enforcement and prohibition. However, enforcement is expensive and demand doesn't just disappear. This results in double-edged inefficiencies, with rising public spending, alongside lost potential tax revenue, while the demand and supply for dangerous low-quality drugs remains.  

 

How to fix this broken market?

If you are running a lemonade stand and the government decide to ban lemonade, will the population just not drink lemonade anymore? No, they will just buy it in a dodgy alleyway. Similarly, in the drugs market, prohibition has not worked, which has led to market failures being created.

As a result, drug dealers love the market being unregulated as they can chuck whatever they find under their sink and sell it as ‘the good stuff’. Arguably, the best solution would be to legalise the market so that it can be regulated. This means no more extortionate prices, quality control and worst of all for the dealers, TAX! And so, asymmetric information decreases by making quality more visible for buyers, and moral hazards decline as sellers will bear the consequences of adding mystery ingredients.

Would everyone start taking drugs? Well, in Portugal in 2001 they decriminalised all drugs and who would’ve thought, drug use in teens declined and so did overdose deaths (Murkin, 2014). So maybe we should take a page out of their book or listen to the green party…

Alternatively, the government can introduce education programs to make people aware of how drugs can be spiked, alongside the long-term effects of drugs on our health. Increased information should lead to a decline in drug use, moving closer to the socially optimal level, and so reducing the deadweight loss. However, there may be a time lag and let’s be honest, who’s going to read the leaflet?

 

What’s The Verdict?

Remember the bag of revels? The issue is, if you get a coffee one, it's not the nicest in the world but you’ll live. But in the case of drugs, if you pull the short straw, it may cost you your life, therefore there needs to be some drastic reform to help fix this broken market. Ultimately, economics is just not a load of theories, but it exists in real world, whether it be the sweets industry or the shady black market.

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References

Ben Lakhdar, C., Leleu, H., Vaillant, N.G. and Wolff, F.-C. (2013). Efficiency of purchasing and selling agents in markets with quality uncertainty: The case of illicit drug transactions. European Journal of Operational Research, 226(3), pp.646–657. doi:https://doi.org/10.1016/j.ejor.2012.12.003.

Galenianos, M. and Gavazza, A. (2017). A Structural Model of the Retail Market for Illicit Drugs. American Economic Review, 107(3), pp.858–896. doi:https://doi.org/10.1257/aer.20150540.

GOV.UK (2025). Deaths related to drug poisoning in England and Wales. [online] Ons.gov.uk. Available at: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/bulletins/deathsrelatedtodrugpoisoninginenglandandwales/2024registrations.

Health, P. (2025). Deaths related to drug poisoning in England and Wales. [online] Ons.gov.uk. Available at: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/bulletins/deathsrelatedtodrugpoisoninginenglandandwales/2024registrations.

Maurice (2024). The Hidden Dangers: Cutting Agents in Cocaine - NIRLAB. [online] NIRLAB - Handheld NIR analysis in the cloud. Available at: https://www.nirlab.com/the-hidden-dangers-cutting-agents-in-cocaine/.

Murkin, G (2014). Drug decriminalisation in Portugal: setting the record straight. [online] Available at: https://www.unodc.org/documents/ungass2016/Contributions/Civil/Transform-Drug-Policy-Foundation/Drug-decriminalisation-in-Portugal.pdf.

Neuberger, A., Oraiopoulos, N. and Drakeman, D.L. (2017). Lemons, or Squeezed for Resources? Information Symmetry and Asymmetric Resources in Biotechnology. Frontiers in Pharmacology, [online] 8. doi:https://doi.org/10.3389/fphar.2017.00338.

Peck, Y., Clough, A.R., Culshaw, P.N. and Liddell, M.J. (2019). Multi-drug cocktails: Impurities in commonly used illicit drugs seized by police in Queensland, Australia. Drug and Alcohol Dependence, 201, pp.49–57. doi:https://doi.org/10.1016/j.drugalcdep.2019.03.019.

Seven jailed for plot to supply Class A drugs in West Yorkshire. (2025). BBC News. [online] 21 Nov. Available at: https://www.bbc.co.uk/news/articles/c865ljynqepo.