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Baby Anthony was a drug addict by his first birthday. Four days later he was dead from a methadone overdose, the youngest victim of Sydney’s rampant heroin epidemic.
He was being cradled in the arms of one of his parents when the officers arrived at a public housing unit in Woolloomooloo. Detectives thought they were investigating a cot death.
Last September Baby Anthony’s mother was arrested by chance by Marrickville police and when searched was allegedly in possession of methadone.
That’s the lead from a Sydney Morning Herald story dated July 28, 1998. The price of a cap of heroin had been falling steadily for years, and purity had reached 80 per cent. Sixteen-year-olds were shooting up in the gutters of Redfern; 827 people would lose their lives to overdoses that year.
Two and a half years later, as the calendar ticked over into 2001, everything had changed. Heroin purity crashed, the price doubled, and a reliable supply became almost impossible to find as police made major seizures and busts.
Let’s pause here. What should happen when the price of a good increases? Consumption should fall, as rational consumers adjust their purchase patterns.
But drugs are addictive. Are addicts rational economic actors?
A new paper to be published this month in The Journal of Law and Economics uses Australia’s 2001 “heroin drought” as a natural experiment to answer that question. The answer, I think, has important things to tell us about our current drug crisis: illegal tobacco.
The rational addict?
In many ways, drug addicts don’t look like rational economic actors. They underestimate addiction risk and buy small fixes when it would be more efficient to purchase in bulk.
The “popular view is that a heroin addict will do anything to get heroin”, says Professor Don Weatherburn, a leading drug researcher at the University of NSW and co-author of the paper. That would make heroin “price-inelastic”: changes in price don’t change consumption, they just increase crime as addicts look for new sources of revenue.
Many economists don’t share that view.
Rather, they view addicts as rational consumers who “assess whether a future life with cigarettes, alcohol, heroin or television is better than one without”, to quote the key theory. As the price of heroin rises, the rational addict cuts back – but with a time delay, as at first the pull of addiction is so strong an addict will do just about anything to get a fix.
When Sydney’s heroin shortage kicked in, crime rates rose, up 8.4 per cent, as heroin addicts looked for new sources of revenue.
But then they started to drop and just kept on dropping and dropping – all the way until 2019. In total, the authors argue, the heroin shortage led to a remarkable 23 per cent drop in crime.
They think their finding pushes back against approaches such as establishing safe injecting rooms, which assume we cannot really alter demand for drugs, only reduce the risk they pose. Actually, you can reduce supply, they argue, and that can lead to a long-term drop in crime.
“The heroin drought is a rare case where law enforcement actually managed a real, sustained collapse in supply,” says Dr Sergey Alexeev, the paper’s lead author. “So if you can truly pull off a drought, prevention is the first best option.”
The key word there: If.
The tobacco wars
A woman who died trapped in a burning home became the first civilian fatality in the gangland war over control of Melbourne’s illicit tobacco trade when arsonists targeted the wrong house.
House sitter Katie Tangey, 27, and her family were “completely innocent” victims in a case of mistaken identity that police now say is linked to the state’s tit-for-tat firebombing war.
The house fire in Melbourne’s west claimed the life of drag performer, photographer and burlesque artist Tangey, along with a golden retriever named Sunny in the early hours of January 16.
That’s a report from The Age, dated February 2025. Melbourne is living through its own drug disaster: illegal tobacco. More than half the tobacco sold in Australia is now illegal, generating billions of dollars a year in sales for the organised gangsters who run the trade. After decades of steadily declining smoking rates, nicotine consumption now shows signs of rising. The thugs vying for control of the trade have taken to firebombing each other.
What’s gone so wrong? The price signal, says Associate Professor James Martin, a specialist in the illicit nicotine trade at Deakin University. “No one has increased cigarette prices as much as Australia.”
Our rational addict theory predicts that as prices rise consumption falls. And evidence from meta-reviews suggest tobacco price increases are the most-effective method of cutting smoking; Australian data seemed to back that up – until now.
Why did increasing the price of heroin reduce demand, but increasing the price of tobacco increase smoking rates?
Because heroin is a “low-volume-equilibrium market”, and tobacco is not, says Martin. By the year 2000, just 2 per cent of Australians had ever used heroin; 11.1 per cent of Australians smoke, 8.8 per cent daily.
In a low-volume market, it’s possible for police to effectively limit supply. In a huge market, that’s not possible. “Despite record levels of arrest and seizures, the impact on drug availability is essentially nothing,” says Martin.
The market responds as supply-demand theory predicts: as the price increases, more sellers enter the market. In this case, illegal sellers. As legal tobacco prices increase, at a high enough price point a significant price incentive emerges for black-market sellers who can undercut the legal price.
“We were able to increase the price for many years. What you see is a lag. Demand gets pent-up. And they [smokers] start engaging in different types of price-minimising behaviour,” says Martin.
Weatherburn agrees. “It was a serious error of policy to think if something is good, more of it is necessarily better.”
That reality argues for a solution that sounds unusual, says Martin: a dramatic cut in tobacco tax, eroding the black market by making legal cigarettes cheaper.
For now, “we no longer control the market,” he says. “You’ve got Kaz Hamad and his crew doing that.”
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