Goods and services are usually voluntarily exchanged in the market place with both parties in the exchange anticipating some benefit from interaction. If, however, market transactions of goods and services are prohibited or made illegal for whatever reason, be it fear of negative externalities to society or on moral grounds, then what would be the result of such prohibitions?

Prohibition has been commonly applied to prostitution, trade in liquer, narcotics, and so on, in various countries and at different times. Although trade in sex, alcohol and drugs date back to the beginnings of human history, where such goods and services are mostly voluntary supplied and demanded, governments have been known to have controled and even banned such activities for reasons of morality, social ethics and even economic problems. Korea is no exception, and as recently as September 23, 2004, the government passed a stricter Anti-Prostitution Act that banned the trade of sex in Korea. To jump to the conclusion, regardless of how convincing the government's arguments in passing the prohibition, it will be difficult to produce the "desired" effects not only because remarkable amounts of effort and money will be required to enforcement the prohibition, but also because innovative, and this time even more harmful, ways to go around the prohibition will surely result. Although banning mutually-beneficial trade can reduce the amount traded to some extent, its comnplete eradication is quite impossible As an eminent economist once put it, "where there is demand there will always be supply". Diverse side effects and social costs that not even the government could predict including degraded quality of products, will most probably result, sometimes meaning tragedy and costing lives.

Let's take the case in which both supply and consumption of liquor were prohibited some 80 years back in the U.S. In 1920, the U.S. enforced what has become known as "the Prohibition" by passing the 18th Amendment. Bootleg saw stricter regulation and punishment, but the price of liquor continued to soar as supply decreased. The prohibition and resulting shortage turned the liquer business into a higher risk and higher return industry. Thus, the likes of Al Capone, remembered by movies as in the "Untouchables," demonstrates how more and more people were attracted to the underground economy, with high profits eroding any fears of conviction. Gangs carried arms which escalated violence to capture a dominant position in the industry. The number of grave crimes soared. Many argue that the notorious Mafia in the U.S. consolidated their positions by the Prohibition. As time went by, the strength of liquor also rose in line with consumption pattern changes. In a sense, for liquor to be less easily disclosed and for it to fetch higher value-added, suppliers in the underground market preferred to handle whisky instead of beer which was bigger in size but cheaper, and the consumers, for their part, preferred to drinking stronger liquor at a time, perhaps, to avoid disclosure. As enforcement of the Prohibition became stricter, incentive to avert the regulation increased as well, resulting in market adaptation in which strength and toxicity of liquor rose at both ends of consumption and supply. As a result, the number of alcoholics increased following the Prohibition.

This is not the end of story. Since liquor traded in the underground market at the time did not carry any trademarks or branding, nor was it sold regularly to patrons at fixed places, there was no way for consumers to file complaints or ask for quality improvements. Put differently, consumers had no protection over ingredients or quality precisely because the trading was prohibited and illegal. Against this background, it is not surprising that sham liquor, a much more potent but toxic, became widely circulated. Thus, as Miller, Benjamin & North (1990) pointed in The Economics of Public Issues, under the Prohibition the death rate resulting from alcoholic-related incidence recorded 30 times today's figure. Also, in 1927 alone, as many as 12,000 people died of alcoholic-related disasters, and thousands of people died or lost their eyesight from contaminated liquor. In 1933, the lofty desire for an "alcohol-free Puritan society" ended with growing violence, social instability, huge costs of law enforcement, a menacing underground market, amongst many other unforeseen side effects.

The Prohibition is a good case that provides valuable lessons regarding policies that focus on wishful thinking and ideals without taking into account market behaviour. In such a case, more often than not, huge social costs instead of the "desirable" results appear. There is a similar case with the narcotic industry worth mentioning. Although, to many perhaps, alcohol and narcotics might not be comparable, yet there are several points they have in common (at least in the economics sense). For example, cocaine was not prohibited in the U.S. prior to 1914. It was consumed freely like how anyone in offices or homes in Seoul would add coffee powder to water - like today's instant coffee that is. As expected, after its use was prohibited, criminal organizations blossomed as many became attracted to the industry as offering an opportunity to earn millions of dollars. To pick the golden eggs as it were, innovative ideas in transportation of illegal narcotics that were not easily detectable appeared. Consumers also changed the way drugs were to be consumed. Snorting or injection rather than oral intake, with the aim to get the largest "bang for their money" while staying away from regulation authorities, became popular. As a result, as with the alcohol case, narcotic intoxication rose as well, and governmental expenditures in treatment and rehabilitation increased significantly. The government might have illegalized narcotics as they were concerned about subsequent social problems including crime. Yet research conducted in Germany and the U.S. show that only 20% of drug abusers purchase drugs with lawful income. Most get involved in drug trade or illegal acts such as robbery or prostitution in order to make money for drugs, which makes the effect of law enforcement more uncertain. The recent tendency which has appeared in some countries such as the Netherlands, Switzerland and England is to remove the total ban and allow less toxic narcotics to be traded in assigned areas.

But let's return to the Anti-Prostitution Act. Surely, the ban will reduce trade in sex at least visibly. The ban will also push prostitution further underground, and as monopoly organizations come to control the market, diverse problems including violence and widespread venereal diseases including AIDS will most probably result. Of course, it remains to be seen, but economic analysis and the experiences of similar prohibitions in the past looks quite convincing. This is quite serious given that the implications can be life saving or threatening. For example, in the Nevada State, where prostitution is allowed and managed in lawful ways, no AIDS carrier has been found among registered prostitutes. In contrast, in Newark, New Jersey, where prostitution is prohibited, 52% of the registered prostitutes were found to be HIV positive. A worst case scenario would be the spread of fatal venereal diseases including AIDS owing to the recent Anti-Prostitution Act in Korea. While the commons are known to be overused or overexploited as property rights are not clearly settled, prohibited goods and service, on the other hand, is doomed to contamination and degrading of product quality that may cost lives. I am not supporting entire liberalization in the trade of such goods, or if you like, bads. Rather, the point that I would like to make here is that social issues including prostitution should not be blind to the economics of supply and demand.

Hwang In-hak (Senior Researcher Fellow, Korea Economic Research Institute,
inhak@keri.org)

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