Economics of Crime and its Prevention

Economics of Crime and its PreventionHow Much is too Much?

PurposeWhat is a criminal act?What is the cost of crime?How is crime prevention provided?What is the optimal crime rate?What are the benefits and costs of illegalizing trade?

What is a crime?A criminal act is one that society has decided it is better off withoutClassification

victim in physical danger

crimes of stealth rather than force

Cost of CrimeCostly transfer of propertyA property crime is a transfer of valuable property from its owner to someone elseThe transfer per se may not be inefficientHowever, the transfer usually involves a cost in terms of loss in value of the transferred property, or harm to the property owner

Cost of CrimeNegative externality from consumption/ tradeTrade in certain goods is illegal when it results in significant negative externalitiesTrade/ consumption of illegal drugs promotes crime, spreads disease and exacerbates poverty

Cost of CrimeWeakens the property rights systemIncreased incidence of property crime undermines the authority of the government to protect private property rights.This may lead to undermining incentives to invest and negatively affecting economic growth.

Cost of CrimeSpending on crime preventionSpending on the court system and police authorityPrivate spending on protection from crime: locks, guards, home insurance,

Costs of CrimeVictim cost ($91 billion): lost property, medical expenses, opportunity cost of lost work time, value of lives cut short

Private prevention ($39 billion): locks, guards

Criminal justice system ($74 billion): police, courts, correction facilities

Opportunity cost of 1.35 million in prison = $46 billion

Total = $250 billion (3.8% of GDP)

Crime Prevention as a public goodTo avoid some of the costs of crime, it is important to allocate resources to prevent crimeWhy is crime prevention provided by the government?What are the special features of crime prevention?THE DIFFERENT KINDS OF GOODSWhen thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? Is the good rival?THE DIFFERENT KINDS OF GOODS Is the good excludable?Refers to the potential of excluding some people from using it.Is the good rival in consumption?Is your benefit from consuming the good affected by the number of people who use it?

Four Types of GoodsRival in consumption?YesYes Ice-cream cones Clothing Cable TVNoPrivate GoodsCollective GoodsNoExcludable? Fish in the ocean The environment Street Lighting Crime PreventionCommon ResourcesPublic GoodsNon Rivalry in Consumption

10Consumer10101010MSB>MPBPublic GoodsThe benefit from consumption of a private good is confined to the buyer Public goods generate external benefits, and thus markets cannot ensure that the good is produced in the proper amounts Reaching an agreement to provide and finance the public good is costly:People differ in the valuation of the public goodInformation about valuation not provided

The government can potentially provide the public good at a lower cost.Example:Will Individuals Provide the Public Good?Example: Both Jack and Jill value street lighting. The value to Jack is $100 and to Jill is $80. Street lighting costs $120Will any invest in street lighting?Will they share it? Is it socially optimal?

Example:Will Individuals Provide the Public Good?Example: Both Jack and Jill value street lighting. The value to Jack is $100 and to Jill is $80. Street lighting costs $120

PayNot payPayNot payJackJillPUBLIC GOODSFree riding is a problem associated with the provision of public goodsA free-rider is a person who receives the benefit of a good but avoids paying for it.Individuals free ride because Their contribution to finance the public good is small, especially in large groupsThey can enjoy consumption of the good when it is provided

The Free-Rider Problem Solving the Free-Rider ProblemThe government provides the optimal amount of the public goodThe government finances the public good by taxing individuals:Tax proportional to willingness to pay, orHead taxIncome tax

Marginal Benefit From Units of Crime PreventionHow do we construct demand for crime prevention?Crime Prevention UnitsMB to Henry ($)149240335430528620MB to Mark ($)353025201810MB to Lewis ($)30252015145Marginal Benefit From Units of Crime PreventionCrime Prevention UnitsMB to Henry ($)MB to Mark ($)MB to Louis ($)MB to society ($)14935302403025335252043020155281814620105What is the socially optimum number of units if the cost is $60 each?1149580656035Optimal Amount of Crime PreventionQuantity0$ DemandMarginal Social Benefit605MCDifferent crime prevention activitiesHow to allocate expenditure among the different facets of crime prevention:Courts, judges and prosecutorsCorrection, rehabilitation and punishment.

Resource Allocation and crime prevention In the absence of a budget constraint, resources would be allocated such that MSB=MSC from each facetThis allocation will determine the optimal budget.

Resource Allocation and crime prevention MSCMSCMSCMSBMSBMSBJudgesCourtsPolice officersLimited Crime Prevention BudgetA limited budget for crime preventionEqui-marginal principle:The crime budget should be allocated among the different crime prevention activities such that the last dollar spent on any one activity yields the same marginal benefit

Example: How would a crime prevention budget of $100 be allocated?P=$20P=$10P=$30PoliceCourtsCorrection UnitsUnitsMSBMSB/PUnitsMSBMSB/PUnitsMSBMSB/P120012001150298215029035035036041043043052520596061060Allocating a Limited BudgetStep 1: Calculate MSB/$ for all activities.Step 2: Spend on activities with the highest MSB/$.Step 3: Stop when the total expenditure equals the budget limit.

P=$20P=$10P=$30PoliceCourtsCorrection UnitsUnitsMSBMSB/PUnitsMSBMSB/PUnitsMSBMSB/P120010120020115052984.921501529033502.5350536024100.543034301520.15202590.36006101600******Example: How would a crime prevention budget of $100 be allocated?To maximize benefit from the crime prevention budgetIf the MSB/$ is not equal among all facets, then then social welfare can increase by substituting towards the facets with higher MSB/$.