Economics of Crime

Victoria Vernon, Ph.D.Empire State College

Examples of economic questions in this course:

• Are we getting our money’s worth for the dollars we spend on police, jails, and prisons?

• If crime is going down, why are we devoting more resources to its control?

• If drug offenders are mostly non-violent, why do we send them to state prison?

• Legalize drugs?

• Death penalty?

Outline for Today

• What is Economics?• What is crime?• Rational criminals• How much crime is there? • What is the economic impact of crime?

• Graphs

• Correlation vs causal link

What is Economics?Economics studies • how people make CHOICES• allocation of scarce resources among alternative

uses • how do we allocate SCARCE RESOURCES to

satisfy the most pressing of our UNLIMITED WANTS?

The science of decision-making

INDIVIDUAL’S RESOURCES– Money– Time– Effort

SOCIETY’S RESOURCES– Land– Labor– Capital– Entrepreneurial abilities

How do we make choices? (Economics Philosophy)

• People are SELFISH– Maximize our own joy, happiness– UTILITY=

subjective measure of joy, pleasure, happiness, satisfaction from consuming goods/services

• People are RATIONAL– compare COSTS and BENEFITS of alternatives,Examples of decisions:

Buying a cup of coffeeGoing to collegeCommitting a crime

• People respond to incentives• All choices involve OPPORTUNITY COSTS

– the next best alternative foregone

Rational decision example: Go to college?

• Benefits:–higher future income: $100,000– lower insurance rates: $5,000–better health: $15,000–other ?

Total benefits : $120,000

Benefits> Costs

• Costs:– tuition, books: $40,000– lost income: $60,000

Total cost: $100,000

Rational decision example: Steel a car?

• Benefits (expected):

Benefits > Costs ?

• Costs (expected):

choice

Work and no violence

Work andbrawl in bars

expect $24,000/yr

Apprehended: $22,000lose 1 month in court andjail

0.1

0.9 Not apprehended$24,000

Expected income: 0.1*$22,000 + 0.9*$24,000 = $23,800Expected cost: $200Compare benefit and cost.

Rational choice: brawl in bars?

What is Crime? Illegal activity.• Motivation: self-interest, greed

– Street Crimes: robbery, burglary, auto theft, larceny

– White Collar: embezzlement, tax evasion, investment fraud, check fraud, telephone fraud, insider trading

– Status Offenses: runaway, truant, vagrant, beyond control of parents

– Black Market: gambling, prostitution, drugs

• Motivation: hate, rage– Street Crimes: homicide, aggravated assault, rape

– Crimes Against Public Order: vandalism, terrorism

– Hate Crimes: Columbine High, dragging death

Crime? • Selling/buying human organs• Discrimination of minorities• Collusive business agreements, monopolies• Breach of contract• Breaking Food and Drug Admin regulations• Spam emails, hackers attacks• File sharing• Jaywalking• Illegal parking• Racial profiling

                                                       [

Serious violent crimes : rape, robbery, aggravated assault, and homicide

Bureau of Justice Statistics, http://ojp.usdoj.gov/bjs/glance/cv2.htm

Property crimes: burglary, theft, motor vehicle theft.

Violent crimes : rape/sexual assault, robbery, aggravated and simple assault.

Property crimes : household burglary, theft, and motor vehicle theft.Bureau of Justice Statistics,

http://ojp.usdoj.gov/bjs/glance/reportingtype.htm

How is Crime Measured

• Victimization Surveys of Households– U S Dept of Justice, Bureau of Justice

Statistics, Criminal Victimization

• Citizen (Victim) Reports to Police– U S Dept of Justice, FBI, Uniform Crime

Reports

2007: 7.3 million people were under correctional supervision including:

Probation - court ordered community supervision of offenders by probation agency.

Prison - confinement in a State or Federal facility to serve a sentence of >1 year.

Jail - confinement in a local jail while pending trial, serving a sentence <1 year.

Parole - community supervision after a period of incarceration.

February 28, 2008

Public Sector

Health

Safety

Civics

Education

Victim’s Income

Thief’sIncome

Economic analysis of crime

• Crime as income redistribution– Involuntary transfer from

victim to thief

Victim’s Income

Thief’sIncome

$6,000

$6,000

Income Distribution

$12,000

Total or Social Income Line:Thief’s + Victim’s Income

$12,000

Income Redistribution$9,000

$3,000

•Crime is income redistribution–Robin Hood: Take from the rich and give to the poor–impact on social welfare: good or bad?

Victim’s Income

Thief’sIncome

$6,000

$6,000

Income Distribution

$12,000Total or Social Income Line:Thief’s + Victim’s Income

$12,000

Income Redistribution$9,000

$3,000 $11,000

$1,000 socialcost of defense

$11,000

Loss of resources spent on defense

What is the nature of crime?

• Crime is income redistribution

• Crime is a dead-weight loss for society– Loss of resources spent on defense

• protection of homes, cars, bicycles

– These resources could be spent on goods and services

– Victim has less incentive to be productive– The impact on social welfare

• Unambiguously bad

• Criminal does not take into account impact on society

Total Costs of Crime for Society• Goods and services (tangible)

– Value of property destroyed– Time and resources spent by criminal– Medical /health services for victims– Police and fire services– Cost of jail time for taxpayers– Loss of productivity and wages by victim • Quality of life (psychic) by victim, family, friends• Loss to bystanders, third parties and society (negative

externalities)– Cost of crime prevention activities: locks, guards,

alarms, insurance, etc– Spending on criminal justice system– Taxes, property values, migration from neighborhoods– Moral climate of society

Choice

Legal work

Illegal work

Unemployed (fail)

Employed (succeed)

Apprehended (fail)

Not Apprehended(succeed)

Example of rational choice:

Legal Work or Illegal Work?

Expected legal Income = 0.9*$12,000 = $10,800

Legal Work or Illegal Work? Choice with Uncertain Outcomes

Choice

Legal work

Illegal work

Unemployed (fail)

Employed (succeed)

Apprehended (fail)

Not Apprehended(succeed)

0.1

0.9

$0

$12,000/yr

0.2

0.8

$0

$14,000/yr

Expected illegal income = 0.8*$14,000 = $11,200

Expected legal Income = 0.95*$12,000 = $11,400Choice

Legal work

Illegal work

Unemployed (fail)

Employed (succeed)

Apprehended (fail)

Not Apprehended(succeed)

0.1

0.9

$0

$12,000/yr

0.2

0.8

$0

$14,000/yr

Expected illegal income = 0.8*$14,000 = $11,200

0.05

0.95

Reduce crime: Maintain a full-employment economy

Expected legal Income = 0.9*$12,000 = $10,800Choice

Legal work

Illegal work

Unemployed (fail)

Employed (succeed)

Apprehended (fail)

Not Apprehended(succeed)

0.1

0.9

$0

$12,000/yr

0.2

0.8

$0

$14,000/yr

Expected illegal income = 0.7*$14,000 = $9,800

0.3

0.7

Reduce crime: Maintain Effective Criminal Justice System– keep the probability of apprehension high

Expected legal Income = 0.9*$12,000 = $10,800Choice

Legal work

Illegal work

Unemployed (fail)

Employed (succeed)

Apprehended (fail)

Not Apprehended(succeed)

0.1

0.9

$0

$12,000/yr

0.2

0.8

-$3,000 (fine)

$14,000/yr

Expected illegal income = 0.8*$14,000 - 0.2*$3,000 = $10,600

$0

Reduce crime: Punish the criminal– make crime less attractive

Summary• Crime is an economic problem

– loss of resources(dead weight loss) from private and public defense

• Your economic status affects your probable behavior: work or crime

• Earning power affects your probable behavior• Social Measures to Reduce Crime

– Maintain a full-employment economy– Maintain an Effective Criminal Justice System

• keep the probability of apprehension high– Punish the criminal

• make crime less attractive