Chapter 5 Economics of Crime and Its Prevention: How Much Is Too Much? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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

How Much Crime Prevention is Good? Prohibition (1922) Prohibition (1922) Russian anti-alcohol campaign (~1987) Russian anti-alcohol campaign (~1987) Benefits of crime prevention against costs Benefits of crime prevention against costs

Questions 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 allocated? How should crime prevention resources be 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? Immorality: who is there to judge? Immorality: who is there to judge? Marijuana smoking Marijuana smoking Alcohol drinking Alcohol drinking Gambling Gambling Adultery Adultery Illegality Illegality Illegal is often not immoral Illegal is often not immoral Burning trash in the streets Burning trash in the streets Littering Littering Spitting in the streets Spitting in the streets

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

Crime Rates

5-8 The Costs of Crime Opportunity Cost Pr inciple Opportunity Cost Pr inciple Direct costs + Negative External ities + Cost of Preventio n, Appr ehension and Correction Total Cost of Crim e Transfers of Purchasing Power Criminal activities versus Crime Prevention Activities

Costs of Crime Many criminal acts go unreported Many criminal acts go unreported Dollar values of crime are uncertain Dollar values of crime are uncertain Human life Human life Safety 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 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 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) Negative externalities imposed by consumption (alcohol, gambling etc)

5-10 Different Types of Goods and Services Characteristics of Goods and Services Characteristics of Goods and Services Exclusivity Exclusivity Rivalry Rivalry Private Goods and Services Private Goods and Services Semi-private Goods and Services Semi-private Goods and Services Externalities Externalities Government intervention in the case of externalities Government intervention in the case of externalities Public Goods and Services Public Goods and Services Free-rider problem Free-rider problem Government production of public goods Government production of public goods

Private Goods—and Others  What’s the difference between installing a new bathr oom in a house and building a municipal sewage sy stem?  What’s the difference between growing wheat and fi shing in the open ocean?  In each case there is a basic difference in the chara cteristics of the goods involved. Bathroom appliance s and wheat have the characteristics needed to allo w markets to work efficiently; sewage systems and fi sh in the sea do not.  Let’s look at these crucial characteristics and why th ey 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 ca n prevent people who do not pay from consuming it.  A good is rival in consumption if the same unit of t he good cannot be consumed by more than one pe rson at the same time.

Characteristics of Goods  A good that is both excludable and rival in consumpt ion is a private good.  When a good is nonexcludable, the supplier canno t prevent consumption by people who do not pay for it.  A good is nonrival in consumption if more than on e person can consume the same unit of the good at the same time.

Characteristics of Goods There are four types of goods:  Private goods, which are excludable and rival i n consumption, like wheat  Public goods, which are nonexcludable and no nrival in consumption, like a public sewer system  Common resources, which are nonexcludable but rival in consumption, like clean water in a riv er  Artificially scarce goods, which are excludable but nonrival in consumption, like pay-per-view m ovies on cable TV

Non-exclud able Excludable Rival in consumptionNonrival 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 Private Goods Efficiently  Goods that are both excludable and rival in consum ption are private goods.  Private goods can be efficiently produced and consu med in a competitive market.

Why Markets Can Supply Only Private 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 “fr ee ride” on anyone who does pay.  When goods are nonrival in consumption, the effi cient price for consumption is zero.  If a positive price is charged to compensate produce rs for the cost of production, the result is inefficiently low consumption.

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

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 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 Tragedy of the Commons The Vigilante groups in the Old West The Vigilante groups in the Old West

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

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

5-22 The Optimal Level of Crime Prevention Cost-Benefit Analysis of Crime Prevention Units of Crime Prevention per Year Total Benefit to Society Marginal Social Benefit Total Cost of Society Marginal Social Cost Net Benefit to Society

Allocation of Crime Prevention Budget How much should be spent on police versus courts, for example? 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 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 Transfers of budget in case the equimarginal principle does not hold

5-24 Allocation of the Crime Prevent ion Budget Equimarginal Principle

5-25 Changing the Legal Status of Goods and Services Marijuana (millions of ounces per year) Price per ounce D1D1 D1D1 S1S1 S1S1 P1P1 M1M1 D2D2 D2D2 S2S2 S2S2 M2M2 P2P2

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