Optimal Drug Policy in Low‐Income Neighborhoods

The control of drug activity currently favors supply‐side policies: drug suppliers in the United States face a higher arrest rate and longer sentences than demanders. We construct a simple model of drug activity with search and entry frictions in labor and drug markets. Our calibration analysis suggests a strong “dealer replacement effect.”  As a result, given a variety of community objectives, it is beneficial to lower supplier arrests and raise the demand arrest rate from current values. A 10% shift from supply‐side to demand‐side arrests can reduce the population of potential drug dealers by 22–25,000 and raise aggregate local income by $380–$400 million, at 2002 prices.