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

2. Key Concepts 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

3. Emotion versus Reason
Crime prevention reallocates resources from productive activities
How do we prevent crime?
Increased budget
But: probably better to ensure quick trials, certain incarceration
Long mandatory minimum sentences
But: releasing repeat offenders to free up space
Outlaw drugs
But: increase in crime due to increased cost of acquiring drugs

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

5. Questions to Ask What is crime? How should governments prevent crime?
What is the optimal level of crime prevention?
How do we allocate resources between police, courts, and penal system?
What are the overall effects of prohibition?
What makes criminals commit crimes?

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

7. What Defines Illegal? Offensive to moral standards
Murder
Theft
Rape
Consequences of which offender is ignorant
Alcohol
Cocaine
Conducive to violation of public order
Traffic rules
Causing decreases in welfare
Industrial pollution

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

9. Crime Rate per 100,000 1986-2006 Year Total Violent Crime
Property Crime
1980
5950
597
5353
1983
5175
538
4637
1986
5480
617
4863
1989
5741
663
5078
1992
5660
758
4903
1995
5278
685
4593
1998
4619
568
4052
2001
4161
504
3656
2003
4067
476
3591
2004
3983
466
3517
2005
3901
469
3432
2006
3809
474
3335

11. Difficulties of Measuring Crime
Unreported crime
? What is the dollar value of...
Human life
Drug consumption
Alcohol abuse
Human trafficking
Overspeeding

12. Opportunity Cost Principle
The net economic cost of crime is the value of GDP without crime minus the actual GDP value.
Opportunity Costs of Crime = Direct Costs + Net Negative Externalities + Crime Prevention Costs
Direct costs
Value of destroyed or damaged property
Net Negative Externalities = Cost of negative externalities (drugs) – value added of produced drugs
What if the value added exceeds the amount of negative externalities?
Crime prevention costs
Apprehension
Correction (prisons, guards)
Not in costs
Transfers of purchasing power (theft)

13. Economic Costs of Crime
Costs of crime prevention activities are best defined
Labor and capital employed in crime prevention increase GDP, which makes crime prevention an economic good
Costs of crime are still not measured in a satisfactory fashion
Difficult to measure the dollar value of negative externalities
Government Level
Direct Expenditure
($ Million, 2005)
Percent
Federal
$40,000
23%
State and Local
$133,883
77%
Total
$173,883
100%

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

15. Exclusivity and Rivalry
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 can prevent people who do not pay from consuming it.
A good is rival in consumption if consumption of this good by one individual reduces the ability of the others to consume the same good. 15

16. Characteristics of Goods
Rival in consumption
Nonrival in consumption
Private goods
Artificially scarce goods
Excludable
• Wheat
• Pay-per-view movies
• Bathroom fixtures
• Computer software
Figure Caption: Figure 18-1: Four Types of Goods
There are four types of goods. The type of a good depends on (1) whether or not it is excludable—whether a producer can prevent someone from consuming it; and (2) whether or not it is rival in consumption—whether it is impossible for the same unit of a good to be consumed by more than one person at the same time.
Common resources
Public goods
Non-excludable
• Clean water
• Public sanitation
• Biodiversity
• National defense

17. Private Goods
A good that is both excludable and rival in consumption is a private good.
A private good provides direct satisfaction to the consumer, and consumption by the others becomes impossible once the good is consumed (exclusivity)
A private good can be shared, but sharing reduces the extent of satisfaction by the consumers
Markets are great at allocating resources when it comes to the private goods 17

18. Semiprivate Goods
Any good or service that is not completely rival and/or exclusive is called a semiprivate good or service.
Driver’s education course
Exclusive since instructor’s time cannot be consumed by two people at the same time: exclusivity
Primary consumption benefit goes to the driver: exclusivity
Other drivers and pedestrians benefit as well because of more safety on the roads: not quite rival
Landscaping, private home
No one can jump over the fence and enjoy the swimming pool: exclusivity
Everyone can enjoy the beautiful view from outside the fence: not quite exclusive
May be rival for the home dwellers, but not really for the outside gazers

19. Semiprivate Goods and Externalities
Semiprivate goods and services can be defined as goods and services with externalities in consumption
Positive externalities: landscaping, driver’s education
Negative externalities: smoking
Government intervention
Private markets in general result in a market failure: resources are not allocated efficiently
Government intervention may improve on the inefficient allocation

20. Internalizing an Externality
Example
Cigarettes are sold at $5 a pack.
Smoking reduces life satisfaction by the others by $1 a pack.
The government introduces a tax of $1 per pack.
In this case this tax is internalizing the externality.
Result: consumers will smoke less (law of demand) and thus the market equilibrium level will get closer to the socially optimal one.

21. Government Intervention in Case of Semiprivate Goods
In case of the semiprivate goods, the government intervention is not replacing the market.
The cigarettes are still being sold, but the market equilibrium is now corrected by taxes.

22. Public Goods A good that is neither rival nor excludable is called
Tsunami alert system
Everyone can benefit from it
If your life is saved due to it, it does not mean fewer lives are saved
Examples of public goods
National defense
Crime prevention
Space exploration
Antipollution measures

23. Government Intervention and Public Goods
Free market most often fails to allocate resources efficiently in case of the public goods.
Government intervention in case of the public goods often replaces the market, as opposed to the case of the semiprivate goods.

24. 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 “free ride” on anyone who does pay.
Vigilante Groups in the Old West
Horse rustling a problem
Cattle ranchers band together in vigilante groups to catch and hang the rustlers, which makes rustling extremely costly
Vigilante groups have maintenance costs
No one single rancher can be excluded from the benefits provided by vigilantes
Every one single rancher is free to withdraw support for the vigilantes and become a free rider
The free-riding problem reduces the quantity and quality of vigilante services because of their non-excludability 24

25. Market-Oriented and Command Systems, and Public Goods
Public goods must be provided by the government because the private market “won’t pay” for their production costs due to the free-rider problem
The government can coerce private individuals to pay these costs by imposing taxes, which is why the government is most likely to provide the public good efficiently
Command systems: the governments provide ALL kinds of goods: public, semiprivate, and public
Market-oriented systems: the governments mostly intervene in the provision of public, but not so much of the private goods.

26. 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

27. The Optimal Level of Crime Prevention
Cost-Benefit Analysis of Crime Prevention 1 2 3 4 5 6
Units of Crime Prevention per Year
Total Benefit to Society
Marginal Social Benefit
Total Cost of Society
Marginal Social Cost
Net Benefit to Society --
200 60
140
380
180
120
260
540
160
360
680
240
440
800
300
500
900
100 7
980 80
420
560 8
1040
480 9
1080 40 10
1110 20
600

28. Crime Prevention
The Government should follow the following rules in dealing with crime prevention:
Increase crime prevention if associated marginal benefits exceed marginal costs
Spend less on crime prevention if marginal benefits are below marginal costs
Do not aim at zero crime rates
Optimal crime prevention occurs at the level of spending where marginal benefits of crime prevention are equal to marginal costs

29. 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

30. Allocation of the Crime Prevention Budget
Equimarginal Principle

31. Example: Equimarginal Principle
Taking $1 away from police works brings about more crime resulting in a 75 cents decrease in GDP
Give this $1 to the court system that deters crime so that GDP grows by $3
Society’s net gain is $2.25, so it makes sense to take $1 away from the police and give it to the courts
Keep on reshuffling the crime prevention budget until marginal benefits in police, court, and correction activities are equalized—this will be your optimal budget allocation

32. Alcohol’s Legal Status
Eighteenth Amendment to the US Constitution: the Era of Prohibition, 1920
Twenty-first Amendment: repeal of the Prohibition, 1933
Effects of the Prohibition:
Rise in murder rate
Rise in assaults with firearms
1933 (last year of Prohibition): 12,124 homicides, 7,863 assaults with firearms
1941: decline in these rates to (respectively) 8,048 and 4,525
Should we ban any goods and services at all?

33. Legalize Drugs? Cons More crime Unexpected consequences Pros
Drug-related crime is not caused by drugs per se, rather by their illegal status
Illegality results in lack of information about drugs’ effects, hence unexpected consequences

34. Changing the Legal Status of Goods and Services
Price per ounce D1
Modest increase in demand: easy to obtain even if illegal S2 P1
Supply shock is substantial since legalization greatly reduces production costs P2
Click 1: D2
Click 2: S2
Click 3: grid lines at new equilibrium S1 D1 M1 M2
Marijuana (millions of ounces per year)

35. Effects of Legalization
Equilibrium:
Dramatic fall in price
Great increase in the quantity supplied
Health Effects:
Quality of marijuana increases, which reduces health risks
Effects on Crime:
Poor users less likely to rob and mug for money to buy marijuana
Fewer criminal cases since illegal acts in the past (i.e. production) are now legal
Effects on Efficiency:
More GDP can be produced with the same resources since marijuana-related crime prevention activities are now redundant
Should we legalize hard drugs?
Adding addiction completely invalidates this analysis, so the answer then is NO.

36. Causes of Criminal Activity
Emotional causes
Economic reasons
Psychic reasons

37. Economic Reasons for Crime
Pursuit of profit
However: most street corner drug dealers earn much less compared to blue-collar jobs
Present value of expected income once on top of the chain

38. Revenue (PxQ) + Psychic Income –
Economic Income
Economic Profit =
Revenue (PxQ) + Psychic Income –
Opportunity Costs
Opportunity costs
Explicit
Building rental and utility fees
Fertilizers and pesticides, seeds
Implicit
Alternative income foregone
Cost of getting caught
Loss of social standing (psychic costs)

39. Marijuana in Appalachia
A depressed region in the Eastern US
Plagued by poverty for many years
Difficult to get a job that pays even a minimum legal standard
Low opportunity costs of an illegal job in terms of foregone legal income
Marijuana growing is widespread