Afghan Opium – Relatively Inelastic
America’s war on terror is also on drugs. After its invasion of Afghanistan there has been a focus to eradicate the opium poppy industry. One way approaching this concern was cash incentives – $10bn in total – by American authorities to Afghan peasants to grow wheat instead of poppies. However opium production has actually increased to record levels in 2013 with over 200,000 hectares being planted. Why has this been the case?
The US authorities have concentrated their shut-down of opium production in the least hostile areas of Afghanistan. This is understandable as the drug authorities are more likely to go and investigate areas that are safer. Therefore production has moved to more militant areas – Taliban controlled. As demand for Afghan Opium is inelastic an increase in the price of opium will lead to higher levels of revenue for cultivators. Therefore by the US authorities decreasing production in safer areas the overall supply initially falls (S1 to S2 in the graph below) which increases the price. A significant amount of the extra revenue goes to the Taliban who, according to the UN, earned $100m from opium in 2011-2012. Source: The Economist