1 Introduction
The consumption of psychoactive substances has been subject to regulation for cen-
turies. While numerous drugs like opium, cocaine, marihuana, and ecstasy nowadays
are completely banned in almost any western society, others are still legally consumed
on a widespread basis, most prominently alcohol and tobacco. Nevertheless, in most
western economies consumption is penalized by taxes and often restricted, e.g. pur-
chase is sub ject to a minimum age. In general, regulation seems to be well justified
from the perspective of economic theory. The consumption of alcohol and tobacco -
and of course the consumption of many illicit drugs as well - may involve external ef-
fects to other individuals and the society as a whole. In many cases, these are unlikely
to be internalized via bilateral bargaining because of transaction costs and ill-defined
or non-enforceable property rights. Annoyance, health problems, and even death by
second-hand smoking, alcohol related violence and crime, road accidents caused by
drug abuse involving other parties1 and extra costs to the social security systems2
may serve as examples for such externalities.
Yet, the question of how to design measures aiming at the reduction of drug usage
remains controversial. This especially applies to so called soft (illicit) drugs and licit
psychoactive substances. At the one hand, it is often argued that consumption of ‘soft’
and even legal drugs serves as ‘gateway’ to drug usage in general and, therefore, as
potential gateway to extremely harmful substances. If this argument is correct, it may
be appropriate to apply tough measures even to soft drugs in order to hit drug usage
in general. Others argue that drug usage is a - maybe unfavorable - yet inevitable
phenomenon in any society. Restricting the access to ‘soft’ drugs may therefore only
encourage potential drug users to turn to other, probably more harmful, substances.
If this argument applies, designing optimal policies for the regulation of drug usage is
more complex, since inter-drug substitution has to be considered an important issue.
Currently, in Germany a heated debate on restricting the consumption of legal
drugs is going on. Namely, smoking bans are discussed with respect to bars and pubs,
1In many cases, e.g. in case of accidental death, statutory compensation for immaterial damage is
likely to be incomplete and, therefore, fails to internalize external costs properly.
2The question of whether smokers do decrease total health care expenditures because of dying early
rather than actually increase expenditures, is still subject to an ongoing debate, e.g. Warschburger
(2000).