Chapter 5Chapter 5Economics of Crime Economics of Crime

and Its Prevention: and Its Prevention:

How Much Is Too Much?How Much Is Too Much?

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Key ConceptsKey Concepts Opportunity costsOpportunity costs

Individually consumed Individually consumed goods and servicesgoods and services

Semicollectively consumed Semicollectively consumed goods and servicesgoods and services

Externalities in Externalities in consumptionconsumption

Free-ridingFree-riding

Public goodsPublic goods

Cost-benefit analysisCost-benefit analysis

Marginal social benefitMarginal social benefit

Marginal social costMarginal social cost

Equimarginal principleEquimarginal principle

Psychic incomePsychic income

Psychic costsPsychic costs

How Much Crime How Much Crime Prevention is Good?Prevention is Good?

Prohibition (1922)Prohibition (1922)

Russian anti-alcohol campaign Russian anti-alcohol campaign (~1987)(~1987)

Benefits of crime prevention against Benefits of crime prevention against costscosts

Questions to AskQuestions to Ask What is crime?What is crime?

What should the government do?What should the government do?

What is the optimal level of crime prevention?What is the optimal level of crime prevention?

How should crime prevention resources be How should crime prevention resources be allocated?allocated?

What are the overall effects of the prohibition?What are the overall effects of the prohibition?

What are the causes of criminal activity?What are the causes of criminal activity?

What is Crime?What is Crime?

Immorality: who is there to judge?Immorality: who is there to judge? Marijuana smokingMarijuana smoking Alcohol drinkingAlcohol drinking GamblingGambling AdulteryAdultery

IllegalityIllegality Illegal is often not immoralIllegal is often not immoral Burning trash in the streetsBurning trash in the streets LitteringLittering Spitting in the streetsSpitting in the streets

Classification of Criminal Classification of Criminal ActsActs

Violent crimesViolent crimes Crimes against personsCrimes against persons MurderMurder RapeRape robberyrobbery

Crimes against Crimes against propertyproperty FraudFraud BurglaryBurglary TheftTheft forgeryforgery

Illegal traffickingIllegal trafficking GamblingGambling Narcotics Narcotics prostitutionprostitution

Other crimesOther crimes Speeding etcSpeeding etc

Crime RatesCrime Rates

5-8

The Costs of CrimeThe Costs of Crime

Opportunity Cost Opportunity Cost PrinciplePrinciple

Direct costsDirect costs

+ Negative Externalities + Negative Externalities

+ Cost of Prevention, + Cost of Prevention, Apprehension Apprehension

and Correction and Correction

Total Cost of CrimeTotal Cost of Crime

• Transfers of Purchasing Power

• Criminal activitiesversus CrimePrevention Activities

Costs of CrimeCosts of Crime Many criminal acts go unreportedMany criminal acts go unreported

Dollar values of crime are uncertainDollar values of crime are uncertain Human lifeHuman life SafetySafety

The net economic cost of crime to the society is the The net economic cost of crime to the society is the difference between what GDP would be without crime and difference between what GDP would be without crime and what it currently iswhat it currently is

Crime can be measured as a loss of earnings to the victimsCrime can be measured as a loss of earnings to the victims ’’ families or as the value of property damagedfamilies or as the value of property damaged

Negative externalitiesNegative externalities imposed by consumption (alcohol, imposed by consumption (alcohol, gambling etc)gambling etc)

5-10

Different Types of Goods Different Types of Goods and Servicesand Services

Characteristics of Goods and ServicesCharacteristics of Goods and Services ExclusivityExclusivity RivalryRivalry

Private Goods and ServicesPrivate Goods and Services Semi-private Goods and ServicesSemi-private Goods and Services

ExternalitiesExternalities Government intervention in the case of externalitiesGovernment intervention in the case of externalities

Public Goods and ServicesPublic Goods and Services Free-rider problemFree-rider problem Government production of Government production of public goodspublic goods

Private Goods—and Others What’s the difference between installing a new

bathroom in a house and building a municipal sewage system?

What’s the difference between growing wheat and fishing in the open ocean?

In each case there is a basic difference in the characteristics of the goods involved. Bathroom appliances and wheat have the characteristics needed to allow markets to work efficiently; sewage systems and fish in the sea do not.

Let’s look at these crucial characteristics and why they matter…

Characteristics of Goods Goods can be classified according to two

attributes: whether they are excludable

whether they are rival in consumption

A good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

A good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time.

Characteristics of Goods A good that is both excludable and rival in

consumption is a private good.

When a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

Characteristics of GoodsThere are four types of goods:

Private goods, which are excludable and rival in consumption, like wheat

Public goods, which are nonexcludable and nonrival in consumption, like a public sewer system

Common resources, which are nonexcludable but rival in consumption, like clean water in a river

Artificially scarce goods, which are excludable but nonrival in consumption, like pay-per-view movies on cable TV

Non-excludable

Excludable

Rival in consumption Nonrival in consumption

Private goods

• Wheat

• Bathroom fixtures

Artificially scarce goods

• Pay-per-view movies

• Computer software

Public goods

• Public sanitation

• National defense

Common resources

• Clean water

• Biodiversity

Characteristics of Goods

Why Markets Can Supply Only Why Markets Can Supply Only Private Goods Private Goods

EfficientlyEfficiently Goods that are both excludable and rival in

consumption are private goods.

Private goods can be efficiently produced and consumed in a competitive market.

Why Markets Can Supply Only Why Markets Can Supply Only Private Goods EfficientlyPrivate Goods Efficiently

Goods that are nonexcludable suffer from the free-rider problem: individuals have no incentive to pay for their own consumption and instead will take a “free ride” on anyone who does pay.

When goods are nonrival in consumption, the efficient price for consumption is zero.

If a positive price is charged to compensate producers for the cost of production, the result is inefficiently low consumption.

Individually and Individually and Collectively Consumed Collectively Consumed

GoodsGoods Individually consumed goodsIndividually consumed goods

Anything that directly benefits the one who consumesAnything that directly benefits the one who consumes Individually consumed goods are exclusive since consumption by one person Individually consumed goods are exclusive since consumption by one person

precludes the consumption by the othersprecludes the consumption by the others Markets are generally good at allocating the individually consumed goods Markets are generally good at allocating the individually consumed goods

through market pricesthrough market prices

Semicollectively consumed goods: in between private and public goodsSemicollectively consumed goods: in between private and public goods Goods and services that yield satisfaction to the direct consumer but also affect Goods and services that yield satisfaction to the direct consumer but also affect

the satisfaction of othersthe satisfaction of others LandscapingLandscaping Orchids and beesOrchids and bees SmokingSmoking Markets may Markets may failfail to allocate semicollectively consumed goods in an efficient way to allocate semicollectively consumed goods in an efficient way Government intervention may Government intervention may internalize the externalitiesinternalize the externalities

Collectively consumed goodsCollectively consumed goods Goods and services that benefit each person in the group while it is impossible Goods and services that benefit each person in the group while it is impossible

for any person in that group to identify the part he or she is benefiting fromfor any person in that group to identify the part he or she is benefiting from Non-excludability (public park or national defense for example)Non-excludability (public park or national defense for example)

The Free-Rider ProblemThe Free-Rider Problem

An individual who consumes benefits An individual who consumes benefits from a collectively consumed good from a collectively consumed good but who pays no part of its cost is but who pays no part of its cost is called a free-ridercalled a free-rider

Tragedy of the CommonsTragedy of the Commons

The Vigilante groups in the Old WestThe Vigilante groups in the Old West

Government Production of Government Production of Collectively Consumed Collectively Consumed

GoodsGoods

Public goods are collectively Public goods are collectively consumed goods and services consumed goods and services usually provided by government usually provided by government unitsunits

Voluntary versus coercive Voluntary versus coercive associationassociation

The Optimal Level of Crime The Optimal Level of Crime PreventionPrevention

Cost-benefit analysis is a technique for Cost-benefit analysis is a technique for determining the optimal level of economic determining the optimal level of economic activity by comparing costs and benefits of the activity by comparing costs and benefits of the activityactivity

As long as benefits outweigh the costs the As long as benefits outweigh the costs the activity should be undertakenactivity should be undertaken

The optimal level is defined as the one for which The optimal level is defined as the one for which marginal benefits are equal to marginal costsmarginal benefits are equal to marginal costs

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The Optimal Level of The Optimal Level of Crime PreventionCrime Prevention

Cost-Benefit Analysis of Crime Prevention

1 2 3 4 5 6

Units of Crime Prevention per Year

Total Benefit to Society

Marginal Social Benefit

Total Cost of Society

Marginal Social Cost

Net Benefit to Society

0 0 -- 0 -- 0

1 200 200 60 60 140

2 380 180 120 60 260

3 540 160 180 60 360

4 680 140 240 60 440

5 800 120 300 60 500

6 900 100 360 60 540

7 980 80 420 60 560

8 1040 60 480 60 560

9 1080 40 540 60 540

10 1110 20 600 60 500

Allocation of Crime Allocation of Crime Prevention BudgetPrevention Budget

How much should be spent on police versus How much should be spent on police versus courts, for example?courts, for example?

Equimarginal principle: Equimarginal principle: an efficient allocation of a an efficient allocation of a budget exists when the last dollar spent on any budget exists when the last dollar spent on any one facet of the budget yields the same marginal one facet of the budget yields the same marginal social benefit as the last dollar spent on any other social benefit as the last dollar spent on any other facetfacet

Transfers of budget in case the equimarginal Transfers of budget in case the equimarginal principle does not holdprinciple does not hold

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Allocation of the Crime Allocation of the Crime Prevention BudgetPrevention Budget

Detect andApprehend

DetermineGuilt orInnocence

Rehabilitateand/or punish

Equimarginal Principle

5-25

Changing the Legal Status of Changing the Legal Status of Goods and Services Goods and Services

Marijuana (millions of ounces per year)

Price per ounce

D1

D1

S1

S1

P1

M1

D2

D2

S2

S2

M2

P2

Causes of Criminal Causes of Criminal ActivitiesActivities

Pyramid-type thinkingPyramid-type thinking

Psychic incomePsychic income——benefits an individual receives benefits an individual receives from a business endeavor in the form of personal from a business endeavor in the form of personal satisfaction rather than moneysatisfaction rather than money

Psychic costs--costs an individual incurs in Psychic costs--costs an individual incurs in pursuing a business in the form of negative pursuing a business in the form of negative personal satisfaction rather than in the form of personal satisfaction rather than in the form of moneymoney