Microeconomics of Organized Crime in Mexico | News Analysis

Table of Contents:

1.     Overview of Actions of Organized Crime on Mexican Economy

2.     Market Supply/Demand Graphs’ Analysis

3.     Market Structures and Government Intervention

1. Overview of Actions of Organized Crime on Mexican Economy

In Mexico, groups of organized crime have formed dominant economic cartels utilizing local business sectors to sustain illicit operations and increase their profit while money laundering. Their actions to control prices and product quantities have altered the balance of supply/demand in many production and factor markets, which resulted in shortages, financial insecurity problems, and excessive increases in the prices of inputs and outputs relative to the incomes of consumers and producers.

2. Market Supply and Demand Graphs’ Analysis

Graph 2.1: Shows graphs for the chicken market and individual firms.

Market for chicken production and a representative individual firm in the chicken market is shown above. Being cheaper than meat and meeting the protein needs of people, chicken is one of the necessities for kitchens, which makes its demand curve more price inelastic than many other foods. Therefore, any other payments for third parties such as taxes or operation permission costs by organized crime cartels in this case, is burdened more on consumers than producers. “In the State of Mexico and Michoacán, there have been shortages and increases in the price of chicken due to extortion by organized crime, as vendors have no choice but to pass the bill on to consumers in order to preserve their business.” (Par 7, Cota) Although these costs are referred to consumers mostly, the presence of crime cartels threatens producers by security problems and increasing costs from other beneficiaries, which all discourages them to operate or enter to the market.

In the news article, the murders of business people and increasing transportation/production costs due to safety concerns in the chicken market are stated by“…eight people involved in the sale and distribution of chicken for human consumption were killed in a single week.”(Par 6, Cota) and “…especially in the Guerrero area, where transportation costs are higher due to insecurity.”(Par 16, Cota) In other words, a decrease in the number of producers and an increase in the input prices took place, both being shifters of supply curve to the left. Accordingly, the decrease in the market supply causes an increase in the prices, which normally allows current producers to earn profits and new enterprises to enter the market in short run.

Graph 2.2: The shaded part in the graph of an individual firm above shows the possible profit in normal conditions, which is now owned by cartels or covered by increasing costs.

However, in this case, individual producers face higher costs relative to their increasing total revenue and on the contrary, they tend to leave the market. As firms continuously leave the market in the short run, the long run equilibrium price for the market form at a higher level each time.

Graph 2.3: Shows the short run economic loss of individual firms due to increasing average total cost, which causes market supply curve to shift to the left for the second time.

Graph 2.4: Shows the long run equilibrium for firms that formed at a higher price after another shift of the market supply to the left.

According to all these, the purchasing power of consumers excessively decreases in short periods of time due to continuous increase of the long run equilibrium prices, which shows not only the producers but also the consumers are victims of organized crime.

3. Market Structures and Government Intervention

The oligopoly formed by the market sovereignty of the interdependent prominent organized crime groups, serves as a monopoly in many stages of production for goods such as chicken, fish, corn tortilla and transportation. In these areas, cartels have the power to set market prices, control the number of the firms in the market and fluctuate additional production costs. Forming the market by their own presence, cartels mostly neutralize other independent firms and the state-owned enterprises in industries due to the incompetence of government. “The increased presence of organized crime that uses fishing as a screen totally exceeds the capacity and powers of civilian government institutions in the sector.” (Par 8, Cota)

With the aim of sustaining their market power, cartels set high barriers to enter the market. One of the most brutal cases in Mexico from the news article is as follows: “…cab drivers in the tourist city of Cancún reacted to the permit granted to Uber to operate legally in the state of Quintana Roo with blocked roads and violence against Uber drivers, passengers, and the authorities” (Par 13, Cota)

Cartels maximizes their profits when producing at the quantity that their marginal revenue equals their marginal cost. However, they charge consumers at higher prices than in terms of this equation and produces less than the socially optimal quantity (where marginal cost equal demand). Also, by not operating at the minimum ATC, they are neither allocatively nor productively efficient.

Graph 3.1: Shows graph for the

                  organized crime cartel.

Considering all these, government incompetence is the main cause of the victimization of both consumers and producers in the market since it could not prevent a new illicit authority forming as a greater power. Therefore, the government should take control of the market through antitrust laws to limit emerging monopolies and encourage fair competition. Similarly, the introduction of legislations to improve the inspection of taxes and transactions, the subsidization of state-owned companies and of companies that generate positive externalities can be another way to regain the market power of the Mexican government.

Bibliography:

Cote, I. From chickens to cabs: Drug cartels expand across the Mexican economy. El Pais. https://english.elpais.com/economy-and-business/2023-09-21/from-lemons-to-cabs-drug-cartels-expand-across-the-mexican-economy.html