Ch 5 – Economics of Crime

Ch 5 – Economics of Crime “If they paid me to stop robbing banks what they’re paying them to stop me from robbing banks, I’d stop robbing banks.” A Bank Robber

Ch 5 – Economics of Crime • How do we decide what is illegal? • Why do criminals commit crimes? • How do we deter crime? • Should we try to deter ALL crime?

Definitions of Crime Ch 5 – Economics of Crime • Immorality • Can’t use immorality as a determinant of illegality • Some activities are clearly immoral to most in society • There are some differences of opinion about other activities • Illegality • Criminal act is one that society (lawmakers) has decided it is better off without. • May be immoral to some, moral to others. • May be dangerous, necessary for order, etc.

Classifications of Consumption • Individually Consumed Goods • Add satisfaction only to the person consuming the good. • ex, drinking a Coke. • Semi-Collectively Consumed Goods • Consumer derives satisfaction, but there are externalities. • Change in satisfaction for other members of society besides consumer. • Government may assist in the production of these goods, but does not have to provide them. • “Free-riders” • ex, education, neighborhood police protection. • Collectively Consumed Goods (Public Goods) • Cannot isolate individual benefits. • Cannot exclude someone for not paying. • Markets will not provide these goods, so government must provide them. • ex, national defense, criminal justice system Ch 5 – Economics of Crime

Costs of Crime Ch 5 – Economics of Crime Costs are measured using opportunity cost principle. Need to include: • Loss of earnings of victim and those close to victim. • Value of destroyed property. • Costs of prevention, apprehension and punishment. • Changes in welfare for ALL members of economy (not just the good guys). Should express net change in GDP as a result of the crime. Can only estimate, no exact measure.

Allocation of Resources Ch 5 – Economics of Crime 3 activities: • Detect and apprehend • Judge and sentence • Punish and rehabilitate How and where should resources be allocated? Equimarginal Principle Should allocate resources where the last dollar spent on one activity yields the same marginal benefit as the last dollar spent in all other activities. Optimal Level • Cost benefit analysis (starting to see a trend here?) • Allocate resources up to point where MSC=MSB

Changing Legal Status of Goods or Services • Abortion services • Gambling • Prostitution • Alcohol • Made illegal in 18th amendment, 1919 • Repealed in 21st amendment, 1933 • Hard liquor was just as illegal as beer, so most drinkers turned to hard liquor. • Illegal activity was not subject to quality controls, so quality deteriorated. • Black market developed because of price ceiling (zero). Mostly a moral issue. Economics can’t speak to the morality of an issue, just the costs and benefits, outcomes if policy is changed. Current issue – Legalizing drugs Proponents of legalization say most costs to society are simply because the drug is illegal. Ch 5 – Economics of Crime

What would happen (from an economics perspective) if we legalized marijuana? Ch 5 – Economics of Crime • Before legalizing, consumption and production takes place at equilibrium, point A. P S1 A P1 D1 Q Q1

What would happen (from an economics perspective) if we legalized marijuana? Ch 5 – Economics of Crime • Before legalizing, consumption and production takes place at equilibrium, point A. • After legalization, demand will increase only slightly because of already widespread use. P S1 A P1 D1 D2 Q Q1

What would happen (from an economics perspective) if we legalized marijuana? Ch 5 – Economics of Crime • Before legalizing, consumption and production takes place at equilibrium, point A. • After legalization, demand will increase only slightly because of already widespread use. • Supply would shift dramatically. Cost of production is reduced considerably. No longer have to avoid detection. P S1 S2 A P1 P2 D2 D1 Q Q1 Q2

What would happen (from an economics perspective) if we legalized marijuana? Ch 5 – Economics of Crime • Before legalizing, consumption and production takes place at equilibrium, point A. • After legalization, demand will increase only slightly because of already widespread use. • Supply would shift dramatically. Cost of production is reduced considerably. No longer have to avoid detection. • New equilibrium at point B. Competition pushes price down, output up. P S1 S2 A P1 B P2 D2 D1 Q Q1 Q2

Should we do it? Economists can’t say. We can only forecast the possible outcome in the market . . . Ch 5 – Economics of Crime We would expect quality to improve as a result of competitive forces, resources will be allocated more efficiently as a result of market forces, and welfare will increase as the market benefits more consumers. Is it morally right? That’s still a matter of opinion. P S1 S2 A P1 B P2 D2 D1 Q Q1 Q2

Causes of Criminal Activity Why do it? Often crimes of passion, or seemingly irrational reasons. Ch 5 – Economics of Crime Economic reasons Income • Crime can be a business, with revenues, profits • i.e., marijuana growers do so because they can earn a profit. • Psychic Income = benefits in the form of personal satisfaction rather than money income (i.e., live near beach, work flexible hours, smoke their own product) Costs • To make a profit, revenue must be greater than costs. • Explicit costs = money costs (supplies, property) • Implicit costs = nonmonetary costs (time, cost of getting caught, opportunity costs) • Psychic costs = Costs in form of negative satisfaction rather than money costs (can’t tell family what you do for a living, feel guilty for breaking the law)

Causes of Criminal Activity Why do it? Often crimes of passion, or seemingly irrational reasons. Ch 5 – Economics of Crime Economic reasons Criminals use cost benefit analysis to determine if, in their case, crime will pay. • If MC<MB, crime will be committed. • If MC>MB, crime will be deterred. How can we ensure costs of committing crime are greater than the benefits?

Ch 5 – Economics of Crime