Robin Moroney over at The Wall Street Journal’s Informed Reader blog picks up on this interesting Ken Dermota/Atlantic ($) article that reports on the weird economics relating to the demand, the supply and the price of cocaine:

Demand for cocaine stays steady, Colombiaís coca fields are destroyed, yet the drugís street price in the U.S. continues to fall . . . [as] drug smugglers and dealers have eked out efficiencies in their operations to keep their prices low. The U.S. Coast Guard has been able to catch only a small percentage of the drugs entering the country since President Nixon declared a ìwar on drugsî in 1971. In 2000, the U.S. decided to switch tactics and take the fight to Colombia, which produces 90% of the cocaine sold in the U.S. Since then, it has spent $4.7 billion fighting rebels who grow and sell the crop, as well as spraying coca fields from the air.
The price of cocaineóthe pure version, not crackóhas kept falling. In the early 1980s, the price of a gram of cocaine was about $600. By the late 1990s the price had fallen to about $200. According to the Drug Enforcement Administration, the street price of a gram of cocaine in 2005 was $20-$25 in New York, $30-$100 in Los Angeles and $100-$125 in Denver.
Some of the price decrease has come from more efficient distribution networks. Some New York smugglers have chosen to eliminate the middleman and pick up their drugs directly from Colombia, offering ìfactory-to-youî prices. The surging trade with Mexico has increased the nooks and crannies for drugs to be hidden as they cross the border, making smuggling both safer and cheaper.
Labor costs also have decreased. Street vendors take a smaller cut of the drugís proceeds. A lot of the drug dealers who fell prey to an aggressive imprisonment campaign in the 1990s are now leaving prison. Their felony conviction and minimal job experience means they have few other ways to make money and are willing to take a pay cut.
The falling street price also reflects the lower risk of handling the drug. The violence of the 1980s crack boom has faded and, since 2001, federal drug prosecutions have fallen 25% as agents get diverted to the hunt for terrorists.

While the Atlantic article focuses on why the price of cocaine continues to drop even though the supply sources are declining, what’s particularly interesting is that the demand for cocaine is not rising dramatically as the price declines. Given its addictive nature, it makes sense that the demand for cocaine would be somewhat price inelastic, but it seems logical that demand would increase at least to some extent as the price falls. This does not appear to be happening. Sounds like a good exam question for an economics course.