Transcript Chapter 1: Human Misery

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
D
S
MSB = MSC
MSB > MSC
MSC > MSB
S
Q1
D
Q
Q2
Quantity
Effects of Marijuana Legalization
Price
D’
D
S
Lower price
Larger quantity
A
P
S’
B
P’
S
D’
S’
D
Q
Q’
Quantity
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