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The objective of this dissertation is to investigate the implications of government policy in trade of legal goods and illegal drugs, and to comment on government policy towards illegal drugs in the United States. To this end, importance of the role of special interest groups in shaping public policy is discussed in general and for the US in particular. Chapter 2 lays out a theoretical model explaining the effect of political asymmetry in tariff setting in preferential trading agreements. Using a three-good, three-nation version of the Meade-model, endogenous tariff setting in a preferential-trading agreement (PTA) is analyzed. Using Nash bargaining framework and allowing for cross-country lobbying, endogenous external tariffs are compared between a CU (Customs Union) and an FTA (Free Trade Area). The model predicts CU to lead to higher tariffs compared to an FTA (for large ranges of bargaining power). This occurs due to international coordination (over the union) which leads to greater efficiency in lobbying. Chapter 3 examines drug enforcement policies using a simple model of enforcement in controlling illegal drug supply for a small open economy. Three types of policies are considered: internal enforcement, border enforcement, and source country control programs, such as crop eradication schemes. The chapter determines the optimal combination of these policies, where the objective is to maximize social welfare from legal goods net of enforcement costs and drug related social costs. In chapter 4, evidence of income inferiority in illegal drug consumption is presented by estimating binary choice probit models with endogenous regressors, using the National Survey on Drug Use and Health. This has been done by estimation of binary choice probit models with endogenous regressors. The results indicate that accounting for endogeneity improves results on income inferiority for the overall population. An implication is that income distribution policies might be more effective in controlling drug consumption. It also points out the regressive nature of the government's substance abuse program. Chapter 5 summarizes the main conclusions of the dissertation and discusses some important implications.