Prohibition

2.1.1. Alcohol Prohibition and the Volstead Act

The first account of prohibition we will examine is the most recognized prohibition policy in the U.S., alcohol prohibition. When we even think of the word "prohibition" in the U.S. or search for it online, we are most likely to think of this event in history. Thus, we examine the economic and policy impacts of U.S. alcohol prohibition.

Fueled by temperance groups like the Anti-Saloon League of America and the Woman’s Christian Temperance Union (WCTU), the "war on liquor" began in the late 1800s in the United States. Beliefs about alcohol and the “evil” that it wrought on society were accepted by a large percentage of the public, as well as by women’s groups, church groups, and politicians by the early 1900s. Alcohol had become increasingly popular since the 1850s, and by the early 1900s, more than 50 million barrels of beer were being produced in the U.S. [4] Views about the havoc that saloons in particular had upon society were becoming well-established lines of thought across the nation. The picture below provides one-way alcohol consumption was viewed during this time period. Alcohol prohibition may have made its way to the center stage sooner but was slow to come to fruition due to constraints on temperance groups, which were made up of a large population of women. During this time, women were not allowed to vote and thus had to act through other means to influence public opinion. In many cases, women were the ones witnessing what alcohol was doing to their families [4].

The Drunkards’ Progress [5]

It wasn’t until January of 1919 when the 18th Amendment to the Constitution was passed that alcohol prohibition became a reality. The 18th Amendment prohibited the "production, sale, and transport" of "intoxicating liquors", but did not define "intoxicating liquors" nor provide penalties. By October of the same year, the Volstead Act was passed, enforcing the 18th Amendment. The Volstead Act defined "intoxicating liquors" as any beverage containing more than 0.5% alcohol by volume and provided further that “no person shall manufacture, sell, barter, transport, import, export, deliver, or furnish any intoxicating liquor" [6]. Neither the 18th Amendment nor the Volstead Act included prohibiting the consumption of alcohol.

While many would argue that the 18th Amendment to the Constitution was highly debated and opposed, it was adopted much more quickly than other constitutional amendments. The Volstead Act was passed rather quickly itself (even after a presidential veto) and took effect in October 1919. Those who supported alcohol prohibition expected crime levels to drop in the years following the passing of the law. However, the prohibition of alcohol was especially difficult to enforce and failed to eliminate crime as expected. In fact, the 18th amendment may have led to a rise in organized crime across the country, as bootlegging of alcohol became even more profitable under a black market [7]. The consumption of alcohol dropped dramatically, and so in that way, prohibition was effective. Unfortunately, crime levels increased dramatically due to the large demand for alcohol and organized crime centered around the production and provision of illegal alcohol.

Raid at Elk Lake [8]

Proponents of prohibition continued to fully support the amendment during the time of alcohol prohibition. In the following quote by The Federal Council of Churches, church officials speak on the evils of alcohol.

While these impacts did occur, many would argue that the rise and impacts of organized crime, like Al Capone and his gang, were far worse than what prohibition set out to mend.

While prohibition was effective in reducing the consumption of alcohol, the continued demand for alcohol provided a strong incentive to produce alcohol on the black market. Due to the high transaction costs (e.g. fines, imprisonment, risk, etc.) of producing alcohol illegally, producers (also known as bootleggers) could charge significantly higher prices than before. The dissipation of the legal market via the 18th Amendment and the Volstead Act meant a surge of consumers willing to purchase alcohol illegally. The Volstead Act, created to enforce the 18th Amendment, was much more difficult to enforce than expected; as such, law-abiding citizens would break the law to obtain alcohol [7].

Under prohibition, many proponents of prohibition expected demand for clothing and household goods (such as soft drinks and candy) to increase, and developers expected rents and land values to increase as bars and saloons closed, improving living conditions in neighborhood communities. Theaters and other entertainment industries expected increases in ticket sales, as well. Throughout the prohibition period though, none of this occurred. In fact, revenues in the amusement and entertainment industries fell across the United States. Furthermore, restaurants failed as they could no longer provide alcohol. Overall, the economic impact of alcohol prohibition was negative, eliminating thousands of jobs in the alcohol and related industries, as well as a decrease in revenues and profits for the food, entertainment, and amusement industries [10]. A significant impact of prohibition on local, state, and federal governments was the significant loss in government revenues from taxation of alcohol, which many states relied upon to fund their budgets, by as much as 75%. The prohibition cost the federal government $11 billion in lost tax revenue. The impact of this lost revenue was a shift from using alcohol tax revenue to fund budgets to relying upon higher income taxes to fund government activities, which continues to this day [10].

Al Capone Mugshot [11]

Due to the inability of the Volstead Act to effectively enforce alcohol prohibition, organized crime increased. Where saloons once operated, now there existed speakeasies, as well as increases in political corruption [12]. In 1932, a wealthy industrialist by the name of John D. Rockefeller, Jr. stated in a letter:

The American people as a majority had begun to oppose the 18th Amendment by the end of the 1920s, and by the early 1930s a large political movement formed in opposition to prohibition.

By December of 1933, the 21st Amendment to the constitution was adopted, with a single purpose, to repeal the 18th Amendment. The 21st Amendment is considered unique. It is the only amendment to the Constitution with the sole purpose of repealing a prior amendment. While prohibition at the federal level ended in 1933, state prohibition of alcohol continued across the country. Mississippi was the last to repeal prohibition in 1966, while Kansas continued to prohibit public bars until 1987 [12].

While the alcohol prohibition ended in 1933, policies still exist that are influenced by alcohol prohibition. These policies include bans on sales of alcohol at supermarkets in certain states; state-controlled alcohol monopolies; regulations on shipping alcohol across state borders; alcohol franchise laws; and restricted sales of alcohol on Sundays [13].

2.1.2 Endangered Species Act

The Endangered Species Act (ESA) was a piece of legislation passed by Congress and signed into law in 1973. The purpose of the act was to conserve and protect plants and animals (and their habitats) that are determined to be endangered or threatened by extinction. [14-15]. A plant or animal is considered to be endangered if: (i) there is threat to their habitat that would cause the plant or animal to not be able to survive; (ii) the plant or animal species has been over-utilized for commercial, research or other purposes; (iii) the species is heading toward extinction due to diseases or threats by other predators; (iv) the animal or plant species is not adequately protected by existing policies or laws; or (v) natural or man-made factors are threatening the continued survival of the plant or animal species [15]. Habitat loss is considered the greatest threat to endangered species, so the ESA protects critical habitats of endangered animals and plants, which includes the land, water, and air necessary for the plant and animal's survival and recovery [15-16]. The following video provides some history and more information about the ESA.

Endangered Species Act [17]

The ESA is a type of prohibition in that it prevents individuals, firms and groups from trading, hunting, disturbing, or harming endangered and threatened plants and animals, as well as protecting all lands, water, and air designated as their critical habitat. One of the most referenced cases for the ESA is the Northern Spotted Owl. This owl species was listed as threatened under the ESA in 1990 [18]. The Northern Spotted Owl is primarily located in the old-growth forests of the Pacific Northwest from Northern California to British Columbia. Each owl pair requires up to 4200 acres of old-growth forest in Washington and 2300 acres of old-growth forest in Oregon and California to survive [19-20]. Logging was and has been a significant economic enterprise in regions of old-growth forest, where the Northern Spotted Owl resides. The presence of the logging industry and the listing of the Northern Spotted Owl as threatened has created significant controversy. This is evidenced by the fact that 60% of the habitat for the Northern Spotted Owl is available for logging or timber production [20]. There were suggestions of setting aside 8 million acres of land as critical habitat for the owl, which some projected could put 12,000 to 50,000 individuals out of work, which would amount to a loss of $470 million to $2 billion in income for these individuals [20-22] Thus, a significant economic conflict exists regarding the protection of this species and economic welfare of firms and individuals working in the logging and timber industry. While this example illustrates the economic issues that can arise from prohibition, it provides an example of the potential unintended consequences of prohibition.

Northern Spotted Owl [23]

One of the other potential unintended consequences of protecting the critical habitats of the Northern Spotted Owl is that it prevents timber harvest and clearing of the old-growth forests, increasing wildfire risk and damage. The Stewards of the Sierra National Forest indicate that protection of the Northern Spotted Owl under the ESA in California has reduced timber harvesting by as much as 90% in some areas. It was the timber harvesting, which is usually done by thinning the forest, that provided a significant mechanism in removing tinder that helped to reduce the impact of wildfires in these forests. The organization now argues that tree density in the Sierra National Forest in California is now 10 times what it should be due to the lack of thinning and harvesting of timber. When coupled with the extreme droughts California has faced in the recent past, this leads to increased risks of highly explosive and destructive wildfires that are harder to control. Furthermore, with the significant decrease in timber harvesting, the number of lumber mills has drastically decreased, meaning current resources or logistics to provide the needed thinning of the forests are not available [24].

2.1.3 Banning Plastic Straws

Plastic Straw [28]

A more recent example of prohibition is the movement by cities (e.g. Seattle and San Francisco) and some countries (e.g. England) to ban or prohibit the use of plastic straws. The movement to ban plastic straws started as a grassroots movement. As it grew, businesses, such as Starbucks, got involved and decided to stop using or supplying plastic straws. Eventually, governments started considering instituting policies to prohibit their use, as well [25].

Why plastic straws? Plastic consumption around the globe was over 300 million metric tons in 2015. Put another way, that amounts to about 25 metric tons of plastic used per person for the world's 7.6 billion people [25]. The campaign to ban plastic straws is born out of a larger goal to reduce our dependence on the use of plastic, which has had a significant impact on our environment. Plastic straws were targeted because they are an item that many individuals are exposed to and use every day that connects them to plastic [26]. Many people are advocating for going back to paper straws or abandoning the use of straws altogether. One potential side effect of the ban is that persons with disabilities may need the use of these straws, as some have argued that there are not enough alternatives or substitutes readily available in the market [27].

The prohibition on plastic straws stems from the same principles as the prohibition on plastic bags, to reduce our use of single-use plastics and plastic consumption. The video below is an advertisement released in the city of Seattle about going strawless. The video represents part of the marketing campaign to reduce plastic consumption, which comes at a cost to produce, representing one type of cost (i.e. marketing and promotion of the prohibition policy or movement) it takes to make prohibition an effective policy.

Click the link to watch the video below:

Straw Ban Advertisement in Seattle [43]

2.1.4 Marijuana Prohibition and Legalization

Hempseed [30]

Use of hemp in the U.S. spans back as far as Jamestown and the early settlers of the American Colony. Hemp is a fiber used to make sails, clothing, and rope. Hemp is the male orientation of the cannabis plant. Marijuana is derived from the flowers of the female orientation of the plant and is used for recreational and medicinal purposes. In 1619, King James I declared that the American colonies would need to do more to support England. This decree required all Jamestown owners to grow and export 100 hemp plants each. The growth of hemp eventually became pivotal to the growth of the United States. In fact, as late as 1900, hemp appeared on the 10-dollar bill of the U.S. [29]. In 1970, President Nixon signed the Controlled Substances Act, making not only marijuana illegal, but regular hemp, one of the world's oldest domesticated crops, illegal, as well [31].

By 1850, marijuana was being used medicinally across the United States after its introduction in medicine a decade prior. Recreational marijuana use followed close behind, although mainly outside of the United States. Marijuana cigarettes were used by Mexican soldiers as early as 1874. At the same time, laws started being passed regulating pharmaceuticals and product labeling requirements started to arise. In 1905, the USDA identified 29 states that were labeling marijuana as “poison”. By 1906, the Pure Food and Drug Act was passed in Congress, requiring the accurate labeling of certain drugs, including marijuana. By 1910, revisions in legislation focused on labeling all narcotics as poisons and limiting the sale of marijuana by pharmacies to those customers with a doctor’s prescription. In 1938, the Federal Pure Food, Drug, and Cosmetics Act was passed, which remains in effect today, providing a specific framework for how prescription and non-prescription drugs and food are handled. Marijuana is still considered a dangerous drug under this act [29].

Marijuana Prohibition [32]

Successful in their campaign against alcohol, temperance groups began focusing their efforts on opiate drugs and marijuana. Between the years 1914 and 1925, twenty-six states passed laws prohibiting marijuana. The marijuana prohibition laws were uncontroversial and passed without much debate [33]. By the early 1930’s, prohibition of alcohol was repealed via the 21st amendment of the constitution, although prohibition on drugs across the U.S. remained in effect. Marijuana and other drugs were blamed for crime, murders, suicides, robberies, and more. Much as proponents for alcohol prohibition focused on alcohol as the cause of these negative social impacts, proponents for marijuana prohibition blamed all of these social impacts on marijuana. Thus, the prohibition of drugs continued long after alcohol prohibition was repealed. Proponents of marijuana prohibition relied on fear tactics at times to continue this campaign. By the 1950s, there was no effort to distinguish between different types of drugs. All drugs were considered dangerous and addictive [33].

By the 1960’s, views on marijuana prohibition began to change. Mainly due to the increase in the number of college students smoking marijuana, the number of incarcerations due to illegal drug use increased tenfold between 1965 and 1970. Thus, people began to question the penalties associated with marijuana use. It seemed to be rather extreme by certain groups to incarcerate some of the best and brightest minds in the country attending college for such a small offense as marijuana use [33]. Disregarding this change in attitude, marijuana was further restricted under the Comprehensive Drug Abuse Prevention and Control Act of the 1970s, which put marijuana in the most restrictive group of narcotics, prohibited even from medical use [33].

Elvis Presley meets President Nixon – 1970 [42]

President Nixon spent most of his time in office continuing his anti-marijuana campaign as part of the “War on Drugs.” Nixon’s director of the Narcotics Treatment Administration recalled that when he joined the administration the president told him, "You’re the drug expert, not me, on every issue but one, and that’s decriminalization of marijuana. If you make any hint of supporting decriminalization, you are history. Everything else, you figure it out. But that one, I’m telling you, that’s the deal.'" President Nixon ironically recruited Elvis Presley as a spokesperson for the War on Drugs circa 1970 [33].

Despite Nixon's continued push to keep marijuana illegal and the continued push for the "War on Drugs", more and more people were beginning to think that the harsh penalties applied to those who were caught using drugs were contrary to society's best interest. Thus, advocates for the legalization of marijuana have focused not on "drugs" but on the medical uses of marijuana and the social costs to the country from the prohibition of marijuana [33]. The "War on Drugs" continued for the next 40 years, with some relaxation of laws and enforcement. For example, in 1996, California passed the Compassionate Use Act, which made California the first state to legally allow the use of marijuana for medical purposes [31]. As of January 2018, nine states have legalized marijuana for recreational use to some degree, including Colorado, Washington, Alaska, California, Maine, Massachusetts, Nevada, Vermont and Oregon. While it is legal at the state level, it is still illegal under federal law [43]. Other states are now considering legalization and the federal government is considering how to deal with the situation.

The video below provides a perspective between two communities on the legalization of recreational use of marijuana in Colorado. The video presents some aspects of both sides of the current debate.

Click the link to watch the video below:

The Marijuana Divide [34]

2.2.1 Prohibition, Supply and Black Markets

Prohibition is often a supply-side reduction policy, due to the better likelihood of enforcement of the prohibition (e.g. there are usually a much smaller number of producers than consumers in the market) [36]. Prohibition makes the production of the prohibited good illegal, but typically is not able to curtail all the production in the market [35]. That is, a black-market forms where the product is produced and sometimes consumed illegally. During alcohol prohibition, it was illegal to produce alcohol, but not illegal to consume. Prohibitions are enforced through fines, confiscation of resources used for production, jail terms, etc. These enforcement mechanisms come at a cost to the producer. That is, the cost of production for producers increases, usually dramatically, due to an increase in transaction costs. These transaction costs can include paying fines, higher costs for resources to produce the prohibited good, monies for bribes, potential loss of production, etc., all because the production of the good is now illegal. Thus, the prohibition policy acts as a determinant of supply, causing the supply curve to shift to the left due to the increase in the cost of production [36]. This shift is illustrated in Figure 1 below.

Figure 1: Supply-Side of Prohibition Market Effect

The significant shift in the supply curve from Supply Curve 0 to Supply Curve 1 is due to the high transaction costs. The market equilibrium moves from \(Q_0,P_0\) to \(Q_1,P_1\). This results in a significant increase in the equilibrium price and decrease in the equilibrium quantity in the market for the prohibited good. The black market is represented by the shift in the supply curve to the left. That is, the legal market becomes a black market after the shift, as all the production represented by Supply Curve 1 is illegal. In this case, there is no assumed change in the demand for the prohibited good. Overall, under prohibition, both consumers and producers are worse off. Consumers lose utility and must substitute goods that they likely feel may be inferior, while producers lose profit and employment [36].

2.2.2 Policy Considerations and Demand

As mentioned earlier, prohibition typically fails to eliminate the market for the prohibited good, giving rise to illegal production and potentially illegal consumption. In the U.S., many drugs are illegal to produce and consume. A prohibition-like policy that could be used to help curb consumption is to place a significant tax on the consumption of the good that you want to prohibit. In this sense, you avoid the direct prohibition of the good but may achieve a significant reduction in the consumption of that good [35]. This result arises from the fact that the tax increases the price of the good to consumers. According to the Law of Demand, as the price of a good in the market increases, the consumption of the good (or quantity demanded) will decrease. The tax is further enhanced by another property of demanded goods, the Law of Diminishing Marginal Utility. This law states that the more you consume a good, the less satisfaction (or utility) you receive for that good [36]. Thus, the tax may have the effect of essentially "pricing" some people out of the market, providing the same benefit as the prohibition. The tax is a market-based policy, in that it does not distort the market, making economic transactions illegal, resulting in a black market like prohibition policies can. The impact of the tax policy will be dependent on how elastic demand is. That is, how much consumption of the good that you want to prohibit (or reduce consumption of) is responsive to price. To see this, let’s consider an example.

Assume that the government wants to institute a policy to prohibit the production of textbooks for undergraduates, due to the large use of wood pulp to produce them and their impact on the environment (through say deforestation). Assume that the own price elasticity of demand (η) for these textbooks is \(η=-0.4\), which is inelastic. Recall, the own price elasticity of demand for textbooks tells us that a 1 % increase in the price of textbooks will decrease the quantity demanded of textbooks by 0.4%. Now assume, the government, in a push to get textbooks off the market, puts a consumption tax on textbooks, which consumers will have to pay when they buy a textbook. The tax comes in the form of an ad valorem tax. Assume the tax is 200%. That is, consumers will have to pay the price of a textbook, plus 200% of its value in taxes. If a textbook was $100, the tax would be $200, making the total cost to the consumer $300 for the textbook. What will be the impact of the 200% ad valorem tax on textbook consumption?

To answer the above question, remember the own price elasticity of demand for textbooks tells us what happens if the price of textbooks increases. The imposition of the tax is like a 200% increase in the price of a textbook. Now, recall from past chapters, that \(η=\frac{%△^D}{%△P}\) \(η =\frac{%△Q^D}{%△P}\)​. We can now use this formula to solve for the \(%△Q^D\) or percent change in the quantity of textbooks consumed. Using the information provided: \(%△Q^D =η/times{%△P} =−0.4\times 200 = −80\) or an 80% decrease in the consumption of textbooks.

Would you need as large a tax if demand was elastic or responsive to price? Consider the situation now when the own price elasticity of demand for textbooks is \(η=-2.0\). Use this and the above information to answer the following question about how a lower ad valorem tariff could achieve the same effect in the market if the good is elastic.

2.2.3 Political Economy and other aspects of Prohibition

In this subsection, we want to touch on two other aspects of the economic analysis of prohibition briefly. These two aspects involve the political economy of prohibition and optimal level of enforcement.

Political Economy of Prohibition - In some instances, the prohibition of a good or service is a result of the government's response to strong or influential interest groups. As will be discussed in detail below, the prohibition on margarine in the late 1800s and early 1900s was primarily due to interests groups lobbying government to prohibit the good. The theory underlying why this may occur is the economic theory of regulation proposed by George Stigler [37]. The idea is that politicians are heavily influenced by the interests of the people they represent, their constituents, especially their best-organized constituents. In addition, politicians will likely favor policies that benefit not only their constituents but well-organized and influential interest groups, as it lowers the costs of supporting that policy and can provide political dividends. Policies that only have the support of the general public are usually not as well supported politically, as the political pay-off is not as high as those that are supported by well-organized and influential interest groups [38]. Thus, prohibition policies many times, as seen in the above examples and below, are enacted due to the interests of certain groups, which may not represent what the majority of individuals feel about the policy.

Optimal Enforcement of Prohibition: A significant issue for policymakers to consider when looking to enact a prohibition policy or law is how to optimally enforce the policy. The government needs to determine at what point the marginal benefit or return from enforcement is equal to the cost of enforcement. Theoretically, at this point, the net gain from enforcement will be maximized. That is, enforcement will achieve the greatest reductions in production and/or consumption of the prohibited good in the most cost-effective manner. The benefits from prohibition include reductions in consumption or production, as well as the value of reductions in harmful impacts that are alleviated due to the consumption or production of the prohibited good. The costs of total enforcement of a prohibition usually far outweigh any benefits achieved [36].