Chapter 5: Economics of Crime

1
Chapter 5 Economics of Crime
2
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

3
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.

4
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)

5
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

6
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)

7
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

8
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

9
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

10
Optimal Level of Crime Prevention

• If we under-supply MSB gt MSC. It is beneficial
  to provide more crime prevention
• If we over-supply MSC gt MSB. It is beneficial to
  provide less crime prevention
• Optimal level of education where DS or MSB MSC

11
Benefit-Cost Analysis
D
Price
S
MSB MSC
MSB gt MSC
MSC gt MSB
S
D
Quantity
Q
Q2
Q1
12
Effects of Marijuana Legalization
Price
D
S
D
Lower price Larger quantity
A
P
S
B
P
D
S
S
D
Quantity
Q
Q
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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

14
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 victims family
• Loss of a useful member of the society