From the Washington Post today:
Authorities and people familiar with the drug trade say violence in Mexico and increased enforcement — symbolized by the Flores case — are having a dramatic effect on Chicago street sales, at least for now. The wholesale price for a kilo of cocaine — about 2.2 pounds — has spiked over the past 18 months, from $18,000 to $29,000 and often more, according to authorities.
I wonder if the unnamed “authorities” in question are being deliberately misleading, or if they simply lack the sense to notice what they just said. The increase in the wholesale price of cocaine ends up, as such increases normally do, in the pockets of the people selling it.
What they have just said is that increased enforcement has increased profits for drug lords dramatically.
Yonatan Zunger’s Blog 
Wouldn’t you need to know the volume of sales to know if the overall profits are up?
I think the implication is that the price went up due to decreased supply – the standard supply/demand curve interpretation.
The per-unit profit is higher, which probably would attract more dealers & such, but I don’t know that translates to overall profit increases for the drug lords.
Not that it matters… most people don’t know boo anyways:
http://redtape.msnbc.com/2009/12/when-i-published-gotcha-capitalism-two-years-ago-i-was-in-for-a-big-surprise-as-i-talked-about-systemic-hidden-fee-fraud-al.html
I imagine that the people selling aren’t the ones who had their stuff confiscated. Sure, it sucks for the people who got busted, but if it was someone else’s suppliers, now you not only have more demand, you have fewer competitors.
I would analyze as follows. There are two different things which enforcement is doing — reducing supply (by confiscating and burning it), and increasing operating costs for producers. (By adding non-financial risks such as arrest and/or shooting of the people on the ground) The former is likely to be a very small effect; I doubt that total drug seizures are going to be a double-digit percent of all the drugs on the street. At first order, at least, we can ignore it.
Increased opex acts like a tax on the product, although since this is a non-financial tax it works in a strange way: the government doesn’t get any money for it. It’s “paid” (in the direct sense) by the people who get arrested and/or killed, which is probabilistically and rather non-uniformly distributed; in particular, it’s paid in blood by the low people on the totem pole, and in increased costs of security/bribes/etc by the people higher up.
The incidence of this tax, and its effect on the quantity sold, is determined by the fact that demand for narcotics is incredibly inelastic (people will buy drugs rather than food), while supply is very elastic. (It’s not hard for a major producer to grow more or less cocaine) That means that (a) the tax is effectively paid for by higher prices to the consumers (they’re very inelastic), and (b) the effect on quantity sold is going to be minimal, since the demand curve is really steep.
So in a market like this one, imposing a larger operating cost on suppliers will drive up prices considerably; this difference will be paid for by the consumers, and will ultimately flow to the providers of security, bribes, and so on.
Good times to be a corrupt official, I guess…
I doubt that total drug seizures are going to be a double-digit percent of all the drugs on the street.
And if they were having that impact, that is so significant a result that it would be one of the talking points. It’s not, ergo, they’re not.
I don’t think they (or anyone else) has any clue WRT the quantity of drugs on the street.
Messing around with supply via law enforcement is by all accounts largely a waste of time and resources, but it’s politically easy. All serious, credible reviews I’ve ever seen have all pointed to fundamentals (education, employment, and frankly, therapy) as the real solution. But that’s work, takes time, and isn’t glamorous
So, you attack the supply curve and point out that you are moving the needle there by talking about how much more expensive it is.
As an aside, Freakanomics has a really good analysis of gang finances due to an unusual capture of the books of a gang. Interesting reading.
In my ideal world:
The government could utterly destroy the drug trade by producing and distributing drugs at production cost. Since, as you point out, demand for drugs is fairly inelastic, it would not significantly increase drug use.
It would dramatically reduce the amount of crime committed by junkies who need to get money for their next fix. It would also reduce emergency room visits and deaths from accidental overdoses due to low quality product.
There would likely need to be a cluster of laws to prevent abuse (eg heavy penalties for driving under the influence or distributing to minors) but I think this could work very well.
I’ve been thinking about some versions of this. I may post something on the subject soon; there are a number of second-order effects to worry about, but I think that one could build a working strategy.
A politically completely infeasible strategy, granted, but one which would actually achieve the stated aims…