A society is considering whether to ban H. Many people use H, but H is controversial because it sometimes harms the user or innocent third parties. Most users, however, do not view other goods as reasonable substitutes for H.  

Under these conditions, what would happen if the society were to ban H?

Demand for H might decline to some degree, since H prohibition includes penalties for purchase or possession. Absent draconian enforcement, however, the reduction in demand would likely be small, with most people evading prohibition at low cost.

The supply of H might also shrink, since prohibition creates the threat of long jail terms for those who produce, distribute, or sell H. Again, however, even strong enforcement would reduce supply only modestly given the opportunity for large profits from supplying H illicitly.  

Prohibition would therefore not eliminate the market in H, even if the size of that market declines. Prohibition would instead create a black market in H, with multiple adverse consequences.

Underground markets are violent, since participants cannot resolve standard disagreements (between customers and firms, say, or between rival firms) using courts, arbitration, or other non-violent mechanisms. Violence is the logical alternative. The United States alcohol industry was violent during but not before or after Prohibition.

Driving a market underground also incentivizes corruption, since market participants cannot address their policy disagreements using lobbyists, ballot initiatives, and other legal mechanisms.

Enforcement of a prohibition implies significant expansion of police power. Victims of theft, assault, or rape complain to the police, as do family members and friends of murder victims. The buyer and seller in an outlawed H transaction, in contrast, have no reason to complain — they are engaged in a mutually beneficial transaction — and reporting the crime would be incriminating. 

Law enforcement therefore adopts more aggressive tactics, such as no-knock warrants, undercover stings, and asset forfeiture, which often challenge accepted views on civil liberties. These infringements on civil liberties are likely to be racially biased, since enforcement against victimless crimes put less weight on concrete evidence. Those police, prosecutors, judges, and jurors who harbor racial bias have more leeway to exercise that bias.

Underground markets also exhibit poor quality control because standard mechanisms for reducing the frequency of adulterated or falsely advertised products are not available (no tort liability, word of mouth, organized boycotts, or regulatory oversight). Users suffer negatives they would not experience from the same amount of use if H were legal.

Beyond these impacts, prohibition rewards those willing to break society’s laws, and widespread evasion teaches everyone that “laws are for suckers.” Government spends tens of millions of dollar trying to enforce prohibition, while forgoing the tax revenue it could collect were H  legal. To the extent prohibition reduces use of H, it does so mainly for those who would use H responsibly, thus punishing exactly the wrong people.

What are real word examples of H? Heroin and handguns.  

The logic of prohibition implies that outlawing either would generate only modest reductions in use while creating a substantial underground market characterized by all the standard evils. Historical experience with prohibitions of these and other outlawed goods supports this prediction.

This indictment of prohibition does not, by itself, mean that modest regulation of heroin or handguns is always undesirable. Minimum purchase ages, restrictions on time and place of use, or moderate sin taxes might nudge use patterns in a socially beneficial direction without creating a black market. 

Yet even mild regulation can be counterproductive because evasion and avoidance are routine (consider drinking on college campuses by those between 18 and 20 years old). Widespread non-compliance teaches disrespect for the law and creates a false belief that regulation has “solved the problem.”

Regulation and taxation do not always stay moderate, moreover, which risks driving legal markets underground, with all the attendant negatives.

In Libertarian Land, therefore, both heroin and handguns are legal, and subject to minimal regulation. Banning one but not the other is logically inconsistent and incurs the evils of prohibition for that good. Banning both avoids the inconsistency but doubles the negatives of driving markets underground.