Chapter 5: Economics of Crime

Underground Economy G.D.P. does not include the value of illegal goods & services because they are not supposed to be produced In 1990, $246 billion illegal goods & services were sold in the market

Sources of Illegal income Unreported income from illegal sources $74 billion (30%): prostitution, gambling, stolen goods, fraud, pornography, etc. Unreported income from legal sources $172 billion (70%): self-employment, wages & salaries, corporate profits, royalties, etc.

Judgments of Individual Actions Morality: evaluation of actions by members of the society Legality: evaluation of actions by law Actions may be considered as –immoral, but legal (abortion) –illegal, but not immoral (speeding) –illegal and immoral (murder)

Crime Statistics Between 1980 and 1997 in per 100,000 inhabitants –Total crime rate increased from 5,950 to 4,923 –Violent crime rate rose from 597 to 611 –Property crime rate fell from 5,353 to 4,312 –The crime rate has been declining since 1992

Expenditures on Criminal Justice In 1996, the U.S. spent $117,440 million on criminal justice activities Expenditures by the federal government totaled $17,440 million (14.9%) Expenditures by state & local government totaled $99,593 million (85.1%)

Equimarginal Principle Optimal 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 of the budget: –Police protection –Judicial & legal systems –Corrections

Crime Prevention Crime prevention is a public or collectively consumed good produced only by the government because: -Yields benefits to each person within a group –No one can determine the value of benefits received –No one person can be excluded from consuming this good –Free rider problem: consuming the good without paying for it

Market for Crime Prevention Demand or Marginal Social Benefit: additional benefit from provision an extra unit of a public good Supply or Marginal Social Cost: additional cost of providing an extra unit of a public good

Optimal Level of Crime Prevention If we under-supply: MSB > MSC. It is beneficial to provide more crime prevention If we over-supply: MSC > MSB. It is beneficial to provide less crime prevention Optimal level of education: where D=S or MSB = MSC

Benefit-Cost Analysis Price Quantity D QQ2 MSB = MSC Q1 S S D MSB > MSCMSC > MSB

Effects of Marijuana Legalization Price Quantity D D P’ P Q Q’ A D’ S S S’ Lower price Larger quantity B

Economic Cost-Benefit of Crime Costs –Loss of resources for crime prevention, apprehension, and judicial systems –Opportunity costs of resources used in crime prevention, apprehension, and judicial systems –Loss of income, both the criminal and victim –Expenditures on medical goods and services to treat the victim Benefits –Employment and income creation from prevention, apprehension, and judicial systems

Psychic Cost-Benefit of Crime Psychic Benefit –Satisfaction from keeping the criminal locked up Psychic Cost –Suffering from the loss of life or injury, both to the victim and victim’s family –Loss of a useful member of the society