Question

There is a debate about whether sterile hypodermic needles should be passed out free of charge in cities with high drug use,. Proponents argue that doing so well reduce the incidence of diseases, such as HIV/AIDS, that are often spread by needle sharing among drug users. Oppenents believe that doing so will encourage more drug use by reducing the risks of this behaviour. As an economist asked, to assess the policy, you must know the following :
i) How responsive the spread of diseases like HIV/AIDS is to the price sterile needles and
ii) How responsive drug use is to the price of sterile needles.
Assuming that you know these two things, use the concepts of price elasticityof demand for sterileneedle and the cross-price elasticity between drugs and sterile needles to answer the following questions.
a) In what circumstances do you believe this is a beneficial policy?
b) In what circumstances do you believe this is a bad policy?

Answer 1

Answer:

a) This will be a beneficial policy if the price elasticity of demand for sterile needles is elastic and the cross-price elasticity of demand between drugs and sterile needles is positive and high.

b) This is a bad policy if the price elasticity of demand for sterile needles is inelastic and the cross-price elasticity of demand between drugs and sterile needles is negative and high.

Explanation:

a) In what circumstances do you believe this is a beneficial policy?

This will be a beneficial policy if the price elasticity of demand for sterile needles is elastic and the cross-price elasticity of demand between drugs and sterile needles is positive and high.

The elastic price elasticity of demand for sterile needles implies that the quantity demanded for sterile needles is higher than the change in its price.

The positive cross-price elasticity of demand implies that both drugs and sterile needle are substitutes. Therefore, the quantity demanded of drugs falls as the price of sterile needle falls to zero.

b) In what circumstances do you believe this is a bad policy?

This is a bad policy if the price elasticity of demand for sterile needles is inelastic and the cross-price elasticity of demand between drugs and sterile needles is negative and high.

The inelastic price elasticity of demand for sterile needles implies that the quantity demanded for sterile needles is lower than the change in its price.

The negative cross-price elasticity of demand implies that both drugs and sterile needle are compliments. Therefore, the quantity demanded of drugs increases as the price of sterile needle falls to zero.