Economics of Crime by Anthony Muir

Crime Facts The FBI collects data from local police departments on seven index crimes. These are divided into: Personal Crimes Personal Crimes Property Crimes Property Crimes

Crime Facts, 7 indexes

Victims of Crime Victims of Crime vary depending on the following factors: Income Income Place of Residence Place of Residence Race Race

Costs of Crime

Cost of the War on Drugs Estimations from People Arrested for Drug Law Offenses this Year: 524,000 People Arrested for Drug Law Offenses this Year: 524,000 People Arrested for Cannabis Law Offenses this Year: 270,000 People Arrested for Cannabis Law Offenses this Year: 270,000 People Incarcerated for Drug Law Offenses this Year: 3,400 People Incarcerated for Drug Law Offenses this Year: 3,400 Money Spent on the War On Drugs this Year: over $12 billion Money Spent on the War On Drugs this Year: over $12 billion

Expected Utility and Decision to Commit Crime Crime decision is based on utility maximization Crime decision is based on utility maximization This graph shows the relationship between income (on the horizontal axis) and utility (on the vertical axis). This graph shows the relationship between income (on the horizontal axis) and utility (on the vertical axis). Concave, because of diminishing marginal utility of income: as income increases, utility increases but at a decreasing rate Concave, because of diminishing marginal utility of income: as income increases, utility increases but at a decreasing rate Utility = (Income)^(1/2) Utility = (Income)^(1/2) Utility is the square root of income Utility is the square root of income

Application of Utility Consider the baseline lawful income to be 100 (point c) Consider the baseline lawful income to be 100 (point c) The potential loot is $44 The potential loot is $44 Probability of Prison is 0.5 Probability of Prison is 0.5 Lawful utility is 10 Lawful utility is 10 Utility from successful crime is 12 (point s) Utility from successful crime is 12 (point s) Utility from failed crime is 8 (point f) Utility from failed crime is 8 (point f)

Application of Utility The individual is indifferent between crime and lawful living EU{U1, U2, p1, p2} = p1 x U1 + p2 x U2 EU{U1, U2, p1, p2} = p1 x U1 + p2 x U2 0.5 x x 8 = 10 utils 0.5 x x 8 = 10 utils Due to diminishing marginal returns, one is indifferent between crime in the two cases.

Preventing Crime If we change the probability of getting caught for the crime from 0.5 to 0.75, the incentive of crimes lessens. EU{U1, U2, p1, p2} = p1 x U1 + p2 x U2 EU{U1, U2, p1, p2} = p1 x U1 + p2 x U x x 8 = 9 utils 0.25 x x 8 = 9 utils 9 utils is now less than the baseline for utils, meaning that you will not commit the crime logically

Preventing Crime This can also be slanted by increasing prison time from 0.36 to.51. This causes failed utility to be 7 utils, changing the model: EU{U1, U2, p1, p2} = p1 x U1 + p2 x U2 EU{U1, U2, p1, p2} = p1 x U1 + p2 x U x x 7 = 9.5 utils 0.50 x x 7 = 9.5 utils This is also less than the baseline util Note: Those with higher income will have a higher opportunity cost of being in prison and will therefore be less willing to take the risk

Anguish Costs Anguish costs explain why people do not commit crimes when it would otherwise be profitable to do so. For example, take row 6 of table (.75) + 8 (.25) = 11 utils This is above the base, however if one would feel 2 utils of anguish about the crime, then the crime would be equal to 9 utils and not worth committing for moral reasons.

Breaking Bad N5kM#t=4m6s N5kM#t=4m6s N5kM#t=4m6s N5kM#t=4m6s Walter White is a high school chemistry teacher in New Mexico, making an approximate average of $40 a year (in thousands) Walter White is a high school chemistry teacher in New Mexico, making an approximate average of $40 a year (in thousands) Over the course of a year, Walter has the potential to make $737 selling Crystal Meth, in addition to his $40 from being a teacher Over the course of a year, Walter has the potential to make $737 selling Crystal Meth, in addition to his $40 from being a teacher Walter has a 0.75 probability of being caught Walter has a 0.75 probability of being caught He will serve the rest of his life in prison if caught, where he will most likely die from Cancer in one year He will serve the rest of his life in prison if caught, where he will most likely die from Cancer in one year N5kM#t=4m6s N5kM#t=4m6s N5kM#t=4m6s N5kM#t=4m6s Walter White is a high school chemistry teacher in New Mexico, making an approximate average of $40 a year (in thousands) Walter White is a high school chemistry teacher in New Mexico, making an approximate average of $40 a year (in thousands) Over the course of a year, Walter has the potential to make $737 selling Crystal Meth, in addition to his $40 from being a teacher Over the course of a year, Walter has the potential to make $737 selling Crystal Meth, in addition to his $40 from being a teacher Walter has a 0.75 probability of being caught Walter has a 0.75 probability of being caught He will serve the rest of his life in prison if caught, where he will most likely die from Cancer in one year He will serve the rest of his life in prison if caught, where he will most likely die from Cancer in one year

Breaking Bad Lawful Income = 40 Lawful Income = 40 Loot = 737 Loot = 737 Probability of Prison = 0.75 Probability of Prison = 0.75 Prison Time = 1 Prison Time = 1 Lawful Utility = 6.3 Lawful Utility = 6.3 Utility from Successful Crime Legal Income + Loot = 777 Legal Income + Loot = 777 Utility = 27.9 Utility = 27.9 Utility from failed crime Prison Cost = 40 Prison Cost = 40 Net Income = 0 Net Income = 0 Utility = 0 Utility = x x 0 = x x 0 = > 6.3 Walter would be better off committing the crime

The Equilibrium Quantity of Crime Shows how the number of crimes one commits increases with loot. Shows how the number of crimes one commits increases with loot. First crime at point m, when loot reaches $400 First crime at point m, when loot reaches $400 As loot increases, quantity of crime will increase As loot increases, quantity of crime will increase The supply curve is positively sloped because various criminals differ in terms of their opportunity cost and anguish costs The supply curve is positively sloped because various criminals differ in terms of their opportunity cost and anguish costs Model of rational criminal is determined by: 1) the probability of being caught and imprisoned 2.) the length of the prison term 3.) the opportunity cost of time spent in prison, which varies with income. 4.) The anguish cost of crime, which varies across individuals Model of rational criminal is determined by: 1) the probability of being caught and imprisoned 2.) the length of the prison term 3.) the opportunity cost of time spent in prison, which varies with income. 4.) The anguish cost of crime, which varies across individuals

Questions 1.) The text states that the justice system in the United States costs tax payers $74 billion dollars. Sources claim that nearly $15 billion of this was spent on the “War on Drugs” Is this a wise investment when taking opportunity cost and morality into consideration? 2.) Suppose you have an opportunity to buy the last ticket to the concert, but in order to do so you must commit the crime of double parking, in which you have a 50% chance of receiving a $36 fine. The concert ticket gives you a surplus of $44 dollars. How would you act in this scenario? 3.) Walter White is better off selling Crystal Meth than not selling Crystal Meth. Why don’t you (or the average person) sell meth outside the law rather than working legally? Do anguish costs play a factor here? What if you only had 0.25 chance of getting caught rather than 0.75?