Occupational Choice and Optimal Drug Policy in Low-Income Neighborhoods Sheng-Wen Chang National Chengchi University N. Edward Coulson Penn State University Ping Wang Vanderbilt University and NBER June 2003 Abstract Part of the debate over the control of drug activity in cities is concerned with the effectiveness of implementing demand- versus supply-side drug policies. This paper is motivated by the relative lack of research providing formal economic underpinning for the implementation of either policy. We construct a simple model of drug activity with market frictions in both labor employment and drug transactions, where the drug price and the distribution of population in a community are determined according to an occupational choice rule and a downward-sloping drug demand schedule. Three potential government objectives are considered. We find that both demand- and supply-side policies have theoretical support under different community conditions. While the demand-side policy discourages active drug sellers, the supply-side policy has an additional drug-dealing replacement effect on inducing potential entry of drug dealers. In low-income neighborhoods, demand-side policy is more effective where the drug problem is more severe or if the government objective is to deter dealer entry or to promote community’s aggregate income rather than minimizing active drug selling. Keywords : Occupational Choice, Demand/Supply-Side Drug Policies, Market Frictions JEL Classification Numbers : D60, J60, K42, H70 Acknowledgments: An earlier draft, entitled “Optimal Drug Policy in Low-Income Neighborhoods,” was circulated by the NBER Working Paper Series No. 9248. We are grateful for the helpful comments of Marcus Berliant, Eric Bond, John Conley, Bob Helsley, Derek Laing, Wan-Shiang Pan, Jennifer Reinganum, Koji Shimomura, Norm Skoufias, Will Strange, Alison Watts and participants at Kobe, Southern Illinois, Vanderbilt, Washington (St. Louis), the Regional Science Association International Meetings in Chicago, the International Conference on Public Economics in Taipei, and the Midwest Economic Theory Meetings at Minnesota. The third author acknowledges financial support from NIH/NIAAA grant no. 1R01-AA11657-01,02. Needless to say, the usual disclaimer applies. Address for Correspondence : Ping Wang, Department of Economics, Vanderbilt University, 415 Calhoun Hall, Nashville, TN 37235, U.S.A.; 615-322-2388 (phone); 615-343-8495 (fax); ping.wang@vanderbilt.edu (E-mail).