Economics of Crime

1. Economics of Crime Chapter 5

2. Opportunity costs Individually consumed goods and services Semicollectively consumed goods and services Externalities in consumption Free-riding Public goods Cost-benefit analysis Marginal social benefit Marginal social cost Equimarginal principle Psychic income Psychic costs Key Concepts

3. How Much Crime Prevention is Good? • Prohibition (1922) • Russian anti-alcohol campaign • Benefits of crime prevention against costs

4. Questions to Ask • What is crime? • What should the government do? • What is the optimal level of crime prevention? • How should crime prevention resources be allocated? • What are the overall effects of the prohibition? • What are the causes of criminal activity?

5. What is Crime? • Immorality: who is there to judge? • Marijuana smoking • Alcohol drinking • Gambling • Adultery • Illegality • Illegal is often not immoral • Burning trash in the streets • Littering • Spitting in the streets

6. Violent crimes Crimes against persons Murder Rape robbery Crimes against property Fraud Burglary Theft forgery Illegal trafficking Gambling Narcotics prostitution Other crimes Speeding etc Classification of Criminal Acts

7. Crime Rates

8. Costs of Crime • Many criminal acts go unreported • Dollar values of crime are uncertain • Human life • Safety • The net economic cost of crime to the society is the difference between what GDP would be without crime and what it currently is • Crime can be measured as a loss of earnings to the victims’ families or as the value of property damaged • Negative externalities imposed by consumption (alcohol, gambling etc)

9. Individually and Collectively Consumed Goods • Individually consumed goods • Anything that directly benefits the one who consumes • Individually consumed goods are exclusive since consumption by one person precludes the consumption by the others • Markets are generally good at allocating the individually consumed goods through market prices • Semicollectively consumed goods • Goods and services that yield satisfaction to the direct consumer but also affect the satisfaction of others • Landscaping • Orchids and bees • Smoking • Markets may fail to allocate semicollectively consumed goods in an efficient way • Government intervention may internalize the externalities • Collectively consumed goods • 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 from • Non-excludability (public park or national defense for example)

10. The Free-Rider Problem • An individual who consumes benefits from a collectively consumed good but who pays no part of its cost is called a free-rider • Tragedy of the Commons • The Vigilante groups in the Old West

11. Government Production of Collectively Consumed Goods • Public goods are collectively consumed goods and services usually provided by government units • Voluntary versus coercive association

12. The Optimal Level of Crime Prevention • Cost-benefit analysis is a technique for determining the optimal level of economic activity by comparing costs and benefits of the activity • As long as benefits outweigh the costs the activity should be undertaken • The optimal level is defined as the one for which marginal benefits are equal to marginal costs

13. Benefits and Costs of Crime Prevention Activities

14. Allocation of Crime Prevention Budget • How much should be spent on police versus courts, for example? • Equimarginal principle: an efficient allocation of a budget exists when the last dollar spent on any one facet of the budget yields the same marginal social benefit as the last dollar spent on any other facet • Transfers of budget in case the equimarginal principle does not hold

15. Is It OK To Legalize Marijuana?

16. Causes of Criminal Activities • Pyramid-type thinking • Psychic income—benefits an individual receives from a business endeavor in the form of personal satisfaction rather than money • Psychic costs--costs an individual incurs in pursuing a business in the form of negative personal satisfaction rather than in the form of money