First, it is critical to draw the distinction between true externalities of drugs and prostitution and costs created by the prohibition. For example, many people claim that increased crime rates are a social cost of drug use. However, it is not clear that this is the case. Property crimes (such as theft) committed by drug users to finance their drug use are probably a result of the high price created by prohibition (estimates put some drug prices under prohibition at 20 times the free market level). Violent crimes committed by drug suppliers can also be attributed to prohibition.
Unlike most businessmen, drug suppliers have no legal recourse for settling debts and enforcing contracts and therefore are more likely to resort to violence. Prohibitionists also claim high medical costs associated with overdoses and poisoning as a social cost of drug use. However, much, if not all, of the variability in content and potency responsible for these costs is a result of the complete inability to create and enforce safety standards in a black market. For this reason, medical costs are more accurately attributed to prohibition. The same is true of many of the supposed externalities of prostitution. For example, many point to the tragedy of underage and coerced prostitution as an argument against prostitution. However, age and consent would be easily enforced in a regulated legal market for prostitution; only the black market status created by prohibition makes regulation impossible. Similarly, the spread of sexually transmitted diseases (STDs) often blamed on prostitution could be largely controlled by instituting mandatory testing in a free market. The fact is that many of the costs of drug use and prostitution are characteristics not of their consumption but of their prohibition.
Conceding that drug use and prostitution may have their own externalities, prohibition is nevertheless an inappropriate policy because it lacks specificity. It is well accepted that a policy designed to correct for externalities should target the actual externality as accurately as possible. This is important because inaccurate policies may not most effectively reduce the social cost of the externality. In addition, overly broad policies burden consumers who aren’t creating social costs.
Consider some possible externalities associated with drug use: increased motor vehicle accidents and negative peer influences in the classroom associated with underage use. Rather than addressing these problems by prohibiting drug use, it makes much more sense to specifically regulate the action which causes the externality. In this case, strictly enforced DUI laws and minimum age requirements would be more effective and would not burden drug users who are not creating social costs. The same holds true for prostitution. To address problems such as underage prostitution, STDs and damage to the sanctity of marriage, one could propose specific policies such as strict testing of STDs and licensing laws that restrict prostitution to the unmarried.
Ultimately, prohibitive policies are inappropriate because they violate our conception of liberty. According to John Stuart Mill’s formulation of liberty, we should regulate only that activity which harms others. By imposing costs on all consumers of drugs and prostitution rather than specifically addressing the social damage caused by certain aspects of their consumption, our policy is creating massive inefficiency. Moreover, because the actual prohibition of these two goods can be linked to numerous additional costs, it may not only be ineffective; it may be harmful.
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