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MADJD-SADJADI
EXPERT PRESS Philip J. Romero and Jeffrey A. Edwards, Editors
Zagros Madjd-Sadjadi
DIGITAL LIBRARIES
This book will guide you to a better understanding
EBOOKS FOR of effective public policy designed to reduce crimi-
BUSINESS STUDENTS nality. By understanding how incentive mecha-
Curriculum-oriented, born- nisms affect criminal behavior, business managers
The
digital books for advanced such as yourself can use this information either to
business students, written reduce criminal activity in your own enterprise or
by academic thought to understand how unethical business decisions af-
leaders who translate real-
Economics of
fect the wider society.
world business experience
into course readings and To accomplish this with a minimum of disrup-
reference materials for tion for you, at the end of many chapters there is
Crime
students expecting to tackle a section called For the Economist where addi-
management and leadership tional material of a more advanced mathematical
challenges during their and theoretical nature, which tends to be more
professional careers. tangential to the non-economists, is provided. In
so doing, business managers and economics stu-
POLICIES BUILT
Zagros Madjd-Sadjadi
way to deliver practical nomics, political science, international relations,
treatments of important and criminal justice. Madjd-Sadjadi has a B.S. de-
business issues to every gree in Computer Science and a B.A. (equivalent) in
student and faculty member. Economics from Sonoma State University, as well
as a PhD in Political Economy and Public Policy
from the University of Southern California.
For further information, a free
trial, or to order, contact:
sales@businessexpertpress.com
www.businessexpertpress.com/librarians The Economics Collection
Philip J. Romero and Jeffrey A. Edwards, Editors
ISBN: 978-1-60649-582-7
www.businessexpertpress.com www.businessexpertpress.com
10 9 8 7 6 5 4 3 2 1
Keywords
crime, economics, rational crimes, organized crime, victimless crimes,
marginal analysis, crimes against property, crimes against persons, game
theory, general equilibrium
Contents
About the author ................................................................................... ix
Preface ................................................................................................. xi
Introduction: Why Should Businesspeople Care About Crime? ................ xiii
such, may have only had a high school or introductory level exposure to
economics, if at all.
Rather than always use the convention of he or she or simply he
throughout, I will, at times, use she in my examples to remind the
reader criminality knows no gender. Finally, I encourage those inter-
ested in other areas of law to read my forthcoming companion book
from Business Expert Press, The Economics of Common and Civil Law.
Introduction: Why Should
Businesspeople Care About
Crime?
The cost of crime is staggering. Nearly 1% of all Americans are cur-
rently in jail or prison and about twice that number are under probation
or parole. In the United States, as high as 10% of the population has
committed a felony. Felony disenfranchisement laws can bar a person
from ever voting again in some states while businesses may ask potential
employees about prior convictions. Smoking marijuana, betting on a
Celtics game (except where gambling is legalized), viewing obscene mate-
rial over the Internet, or having one too many drinks before getting in a
car can mean, under 3 strikes provisions, a life prison sentence for some-
one with prior felony convictions. Spending on prisons, lost productive
capacity due to incarceration, costs to victims of time and medical
expenses, payments to security companies, and payments for insurance
against theft drain about $2.4 trillion a year from the U.S. economy
based on gures given by Anderson1 and adjusted for ination.
Business leaders who care about their businesses and the communi-
ties in which they reside and work have an active stake in this question.
A lower quality of life in areas replete with crime means fewer jobs and
property losses associated with vandalism and theft relegate certain
neighborhoods to retail deserts with few opportunities for residents to
acquire goods from businesses larger than small convenience markets.
High losses from shrinkage (the accounting term for retail losses of
all types) require higher gross margins and higher prices for everyone. In
2011, according to the University of Floridas National Retail Security
Survey, shrinkage accounted for 1.4% of sales, translating into $35 bil-
lion in losses. Of this, 25% was due to shoplifting, 45% was employee
theft, and 12% was administrative error. The remainder was caused by
spoilage, accidental losses, and vendor fraud. When one considers net
margins for retailers are typically between 1% and 5%, it should be
clear why business leaders must take all cost-effective measures possible
to reduce these losses.
xiv INTRODUCTION
What Is a Crime?
Dening crime is tricky and carries certain complications. Crime is a trans-
gression of the law but laws vary between localities and time periods. From
1919 to 1933, it was illegal to serve alcoholic beverages in the United
2 THE ECONOMICS OF CRIME
States. Today, prohibition has been repealed, although laws exist to pre-
vent the sale of intoxicants to minors. In the 19th century, cocaine was
proclaimed the latest wonder drug, used mostly to treat pain but also
everything from allergies to drug addiction. It even was part of Coca-Colas
formula, which contained traces of it until 1906. Cocaine was sold over the
counter until 1914 when it was declared a controlled narcotic based on
high incidence of addiction.
When Jerry Lee Lewis visited England with his 14-year-old wife, Myra
Gale Brown, in 1958, it caused a sensation, though he had been legally
married in his state.
Until 1967, interracial marriage was illegal in 15 states, while sodomy
was a felony in 13 states until 2003. Marijuana is legal and openly used in
The Netherlands, while possession is a crime in the United States. Prosti-
tution is illegal throughout the United States, except for certain parts of
Nevada. There are restrictions on gambling in most states and the mini-
mum drinking age varies by province in Canada. Denitions of crimes may
differ: the level at which one is charged with driving under the inuence of
alcohol is 0.02% in Sweden, 0.05% in Japan, and 0.08% in Canada and
the United States. Comparing crime rates is problematic when denitions
of crimes differ across jurisdictions.
While crime often has a geographical focus, countries can also apply
their laws extraterritorially with regard to their own citizens. Americans
working abroad are required to continue to le income taxes with the
U.S. Internal Revenue Service, even as they might be forced to le with
their foreign country of residence. Americans, when they travel overseas for
sexual liaisons with underage foreign girls, are liable for prosecution upon
return to the United States, even if the host countrys laws allow for such
encounters. On the other hand, an American under the age of 21 legally
drinking in a foreign country is not subject to prosecution, even if they
would be if they had engaged in the same behavior in the connes of the
United States.
Immigration status can make some things criminal or may exempt peo-
ple from prosecution. Diplomatic immunity, a standard feature of interna-
tional relations, exempts foreign diplomats and their immediate family
members from prosecution by the country to which the diplomat is posted.
This is to protect foreign dignitaries from being tried on trumped-up
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 3
charges. The sole recourse of the host country is to expel the diplomat
unless her country of citizenship allows for her prosecution within the host
country. This does not mean the diplomat has a free pass to commit mur-
der and mayhemindeed, she will likely nd herself prosecuted upon
return to her own country if the charges are valid.
A foreign visitor will nd himself unable to work or attend school
unless his visa permits such activity. Violating terms of his visa subjects
him to possible deportation. At the same time, ones visa status might con-
fer benets as foreign nationals who are not permanent residents are not
subject to certain requirements. They do not have to le income taxes on
their worldwide income (only the income they receive in the host country),
and can maintain multiple-spouse marriages that are legal in their country
of citizenship, and are exempt from military service in their host country.
Severity of sentencing for crimes differs from jurisdiction to jurisdic-
tion. While some states enforce the death penalty for murder, others have a
maximum penalty of life imprisonment. Even if the death penalty applies,
the likelihood that someone will be sentenced to death is far greater in
states such as Texas and Florida than in Wyoming, which, although it has
had the death penalty on the books since 1977, has only one person on
death row and only executed one other person under the revised law.
In case of this book, we use a simple denition: if it is dened as a
crime in a jurisdiction, it is a crime, regardless of whether it is legal
elsewhere.
Present Value
Benets (and costs) accruing in the present are more readily considered
than in the future because we value the present more. Criminals have short
time horizons, tending to value present gains more than (possible) losses
associated with incarceration. To discount the future, we apply a discount
rate to our actions. How do we calculate the rate? One way is to ask: at
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 7
what interest rate are you indifferent between putting money in the bank
for one year without being able to withdraw it or having it in your hands?
This interest rate is your discount rate, r. The number of years you are
willing to wait is the time, t. We then take the Present Value (PV ), which
is the amount of money you are putting in the bank, and multiply it by
(1+r)t to obtain the amount of money you will have at time t, your Future
Value (FV ). If your interest rate is 10% and you invest $1,000, you would
have $1,100 at the end of year one, $1,210 at the end of year two (10% of
$1100 = $110, added to the $1,100 we had at the end of year one), and
$1331 at the end of year three (10% of $1210 is $121, added to
$1,210 gives us $1331):
PV = FV/(1+r)t
Thus:
Criminals may have a higher interest rate than the rest of us. They do,
after all, go to loan sharks more often, who charge much higher interest
rates than banks.
in advance. The consequences are not completely calculated. Yet, these are
instances of maximizing benets or minimizing costs, two sides of the same
coin. In a crime of passion, the individual disregards the punishment that
will accrue to them as their concern is with short-term consequences.
Attempting to kill or cause bodily harm is the goal and the way an econo-
mist approaches the problem is to see if it was achieved with the minimum
possible short-term cost. Crimes of opportunity, like picking a pocket or
stealing a briefcase left in the open, are conducted to minimize possible
detection or maximize potential gain. Thieves steal from those who are
well-dressed (assuming they have fatter wallets) but also those who are not
paying attention (easy marks). They maximize benets or minimize costs,
even if they might regret the decision later. We will use the term rational
behavior to mean benet-maximizing or cost-minimizing behavior.
Economics examine broad public policy implications, not any one
persons actions. Raising the ne for exceeding the speed limit will not stop
everyone from speeding. However, the total number of speeders will
decline, even if some do not choose to slow down with higher nes. Pre-
tend you are late for a meeting and if you do not arrive on time you lose
$20. You cannot make it to the meeting if you do not speed and you will
make it to the meeting if you do. You have a 10% chance of getting caught
and, if caught, you will be late for your meeting and will be ned $100.
Will you speed? You might gure with a 10% chance of getting caught and
a ne of $100, it is better to speed since 10% of the time you lose $120
(the ne plus the $20 for being late). On average, you expect to lose 10%
$120 = $12. That is better than losing $20 for certain, isnt it? What if
the ne were raised to $10,000? Now you better not speed. Similarly, if the
meeting is more important, you will be more likely to speed. What about if
the chance of getting caught were lowered to 5%? Raised to 90%?
Wont these cause changes in behavior?
There should be some point where anticipated cost equals anticipated
benet. Perhaps it is at a ne of $180 and a 10% chance of getting caught
versus the $20 you lose if late for the meeting. Any ne above this level will
cause you not to speed. Any ne below will cause you to speed. We call this
the indifference point and say you are at the margin. Being at the margin
means you are indifferent between action and inaction. Altering the ben-
ets or costs will cause a change in behavior.
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 9
Opportunity Cost
Opportunity cost is the value to the person of the next best alternative not
undertaken. In considering non-trivial actions, it is typically the most prev-
alent cost for an individual.
How does opportunity cost enter into the question of analyzing crime?
There are at least three ways we use this concept. First, we look at choices
individual criminals make. Suppose you are a criminal. You can choose to
10 THE ECONOMICS OF CRIME
steal one of the two reasonably new Honda Accords but not both. The rst
car has keys in the ignition, the second car is locked and the driver has used
a steering wheel immobilizer device. Which car is more likely to be stolen?
Obviously it is the one with the keys in the ignition. The cost of stealing a
car in terms of lost time and potential effort is much higher when the car is
secured. Does this mean the secured car will not be taken? No. However, if
there are easier or more protable targets available, the likelihood of theft is
reduced by these actions.
Second are choices individuals and rms make to prevent or mitigate
crime. Every dollar spent and each hour of time undertaken to secure one-
self against crime is money and time not spent doing something else. When
my daughters were young and we lived in Jamaica, I had an alarm system
and burglar bars in my home but did not purchase a gun. The alarm system
and bars were relatively minor costs relative to the chance of theft. However,
a gun with two small children has a very high opportunity cost. If one of my
daughters had come upon the alarm and accidentally triggered it, the alarm
company will send armed response to investigate. If one of my daughters
accidentally found my rearm, consequences would be far more serious.
Given I am prone to being forgetful, I realized the possibility of such an
occurrence is higher than with other individuals, so I rationally decided
against a rearm at the time (that it is almost impossible to procure a rearm
legally in Jamaica may also have played some role in my decision).
We can also look at the choices governments make to combat crime.
Crime prevention is a protection mechanism that attempts to secure already
created goods but every dollar we spend on crime prevention is a dollar we
cannot spend on good or service creation. We trade additional goods and
services for more protection. A city or state that spends more on crime pre-
vention must spend less on something else, such as schools, roads, or sewage
treatment, or must tax its citizens more heavily, which reduces consumption
of private goods and services, such as groceries, gasoline, or amusements.
Choices once made open up possibilities and close off others. A person
with a job is usually less likely to engage in crime due to fear of losing that
job. However, holding certain types of jobs (such as auditor or CEO of a
major corporation) allows one to engage in criminal activity that someone
who lacks such a job would not be able to do. Barry Minkow, founder of
Zzzz Best Carpet Cleaning Company, pled guilty to securities fraud
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 11
Marginal Analysis
When economists talk about how people make decisions, they use one of
two models: the rst is marginal analysis and the second is institutional
analysis. We will defer our discussion of institutional analysis until later in
12 THE ECONOMICS OF CRIME
this chapter and instead discuss the decision-making method most often
taught in introductory economics: marginal analysis.
People make decisions by weighing costs and benets at the margin.
The margin is the decision you make on whether to buy an additional unit
of something or not. Suppose you are the Superintendent of Public
Instruction for the local school district. There are three schools in your
school district and librarians at each school are complaining about book
theft. You cannot give them additional money but they have a solution to
reduce costs without increasing the budget. Indeed, they promise to
increase spending on new books, a goal high on your agenda as Superin-
tendent. Each year, the high school in your district experiences $5,000 of
book theft, while the junior high loses $1,000 of books to theft, and ele-
mentary school book theft costs $500. The librarians want you to purchase
an anti-theft device from a local rm to theft by 90%. It will cost $900 per
school per year with no discount for multiple schools. The librarians tell
you this is a very good deal because you will reduce losses from $6,500 to
only $650, a savings of $5,850 at a cost of just $2,700. That means an
extra $3,150 a year for purchasing new books.
It is a good deal until you realize you can do better: only install the
system in the high school! That saves $4,500 on theft for only $900, giving
you an extra $3,600 for purchasing new books. At the junior high, benets
(reducing theft losses by $900) equal costs. You also wont install at the
elementary school, where it will cost $900 but only reduce theft losses by
$450. Sometimes preventing crime isnt worth it.
We can combine these two schedules into one schedule (Table 1.3)
and determine that the price where quantity supplied equaled quantity
14 THE ECONOMICS OF CRIME
$500 S
$400
$300
Price
$200
$200
$100
7,500 D
$0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Quantity
Changes in Demand
The price of the good is the result of the interaction of the supply and
demand schedules. Quantity sold is likewise determined by this
$600 S1
$500 S0
$400
Price
$300 $250
$200
Transaction
$100 Cost = $100 6,000
D
$0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Quantity
Figure 1.2. Supply and demand of crack cocaine with a $100 trans-
sactions cost.
16 THE ECONOMICS OF CRIME
Table 1.4. Supply and Demand of Crack Cocaine with a $100 Trans-
sactions Cost
Quantity Price paid Transactions Amount received Quantity
demanded by buyer Cost by seller supplied
(in ounces) ($/ounce) ($/ounce) ($/ounce) (in ounces)
15,000 50 100 50 0
10,000 100 100 0 0
8,500 150 100 50 2,500
7,500 200 100 100 5,000
6,000 250 100 150 6,000
5,000 400 100 300 9,250
2,500 500 100 400 10,000
interaction. The demand and supply schedules are simply schedules that
hold everything else constant except for price. They show how quantity
demanded or supplied will change in response to changes in price. But
what determines the demand and supply schedules? In other words, what
determines demand or supply other than price? We will begin by examining
demand. In addition to transaction costs discussed earlier, we will look at
six basic, though non-exhaustive, factors that determine demand: prefer-
ences, income, prices of related goods, anticipated changes in quantity,
number of participants, and the demand for output goods.
First, though there is some dispute in economics over this since many
economists argue preferences cannot change (discussed further in the sec-
tion on rational addiction), there are the preferences (or tastes) of con-
sumers and suppliers. Changes in fashion, age distribution of a population,
advertising, or any of a myriad of things cause a change in the desirability of
a product or service. When something is made illegal, this may drive people
to desire it, especially if the perceived chance of being caught is low. In
such cases, we see an increase in both the price and the quantity sold
(Figure 1.3).
Second, there is income. As income changes, so does demand for var-
ious products. Demand to an economist is effective demand as opposed to
simple desire. It must be coupled with wherewithal to purchase. A drug
addict may prefer, if the price were the same, the crystal form of
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 17
Price
D1
D0
Quantity
Price
D0
D1
Quantity
Individuals reasonably see the two goods as competitors for their funds. If
we raise the price of hashish relative to marijuana by increasing penalties for
hashish while leaving penalties for marijuana possession unchanged, we
will see an increase in the demand for marijuana as hashish users switch.
Marijuana and hashish are substitute goods. As the price of one good rises,
demand rises for the good that does not change in price. Complementary
goods are goods with the property that as the price of one good rises,
demand falls for the good that does not change in price. This is usually
because the two goods are consumed together. Thus, hashish and tobacco
are complementary goods because hashish is often smoked in combination
with tobacco to mitigate its increased potency when compared with mar-
ijuana. A rise in the tobacco tax lowers demand for hashish (and, by exten-
sion, raises demand for marijuana, so raising cigarette taxes increases
marijuana consumption). Just because two goods are complementary
goods does not mean one can decide to raise the price on either good with
equal effect. Guns and bullets are complementary goods but doubling the
price of bullets is likely to have a different impact on gun sales than dou-
bling the price of guns. Increasing the cost of a good only affects its future
sales. If you want to decrease sales of bullets to existing gun owners, you have
to increase the price of bullets and not guns. With legal goods, increasing
the price of a complementary good is not as effective as raising the price of
the good itself. When looking at illegal goods, however, it is more effective
to limit the sales of those legal, but complementary, goods because
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 19
regulating sales of legal goods is far easier than regulating sales of illegal
goods. Since the decongestant pseudoephedrine can be made into meth-
amphetamine quite easily (no, I am not going to tell you how to do it), the
law has strict limits on the quantity of decongestants containing pseudo-
ephedrine that individuals can buy.
Fourth, there are anticipated changes in quantity or quality. When
something is to be made illegal, demand often shoots up. President Kennedy
reportedly sent Pierre Salinger, his press secretary, out to secure Cuban cigars
immediately prior to imposing the Cuban trade embargo in 1962. In the
early 1980s, the development of crack cocaine, a derivative of greater potency
and purity that delivered a nearly instantaneous high, likely increased
demand for cocaine in general.
Fifth, we can look at the number of participants in a market. Immi-
gration and births will increase demand for goods while emigration and
deaths decrease demand.
Sixth, there are prices of output goods. If a good is used in the produc-
tion process, it is affected by demand for all goods created from that good.
The cannabis plant is used to make both marijuana and hashish. Suppose
marijuana and hashish are legalized. This would cause the price of mari-
juana and hashish to fall and demand to rise. Demand for goods used in
the production process will rise. That means demand for cannabis plants
will rise. This type of demand is known as a derived demand since people
do not purchase cannabis plants except to produce marijuana or hashish,
unlike other goods that have a value to the consumer from the product
itself. Supply and demand depend on the perspective we are taking. Pro-
ducers of marijuana demand cannabis plants and supply marijuana, while
producers of cannabis plants demand seeds and supply cannabis plants.
Changes in Supply
S0
S1
Price
Quantity
S1
S0
Price
Quantity
S1
S0
Price
Quantity
S0
S1
Price
Quantity
Institutional Analysis
Up to now I have emphasized the individual as an autonomous agent in
society. But what about society? Doesnt it have a role to play in determin-
ing the level and extent of crime? Absolutely. In economic theory, institu-
tions provide the legal and social framework within which individuals act.
Thus they provide constraints and incentives that work on individuals to
advance common aims. Society is not merely the sum total of individual
preferences: it has a historical legacy and there are certain dening charac-
teristics about societies that make it easier or more difcult to affect change.
According to institutional economics, within each society, there are
several institutions, religious political, social, and education to name a few,
which dene and alter preferences in individuals. Advertising, for example,
acts to redene wants to make individuals desire things that they have not
had before. This approach is in contrast to the neoclassical economics claim
that preferences are static. This distinction is a sharp distinction between
institutional economics and neoclassical economics, the dominant school
of thought in economics and which we spend the better of this book
describing.
Institutional economics examines how organizations change and how
individuals both react to and precipitate those changes. Instead of
individuals deliberating over a decision, making it as a result of a clear
calculus of the benets and costs, institutional economics supposes that
individuals display only bounded rationality: the world is too complex to
handle all possible solutions so that only some are considered and analyzed.
We can accommodate this criticism within a neoclassical framework. Cog-
nition takes time and effort so we economize on it when it is not worth-
while to engage in such tasks.
Institutions also affect behavior by altering property rights and thus
both the distribution of income in a society and the decisions individuals
make. Property rights might legitimize past illegal behavior (the Kennedys
were not forced to give back bootlegging prots after Prohibition ended) or
they might force certain individuals to begin life with a limited endowment
(freeing slaves after the Emancipation Proclamation did not give these indi-
viduals claim to the goods and services of their former masters). Each of
these institutional changes will create a different society: more able to react
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 23
Direction of
preference
Transportation
We can also look at the choice between two economic bads. Some
individuals derive utility from engaging in violations of societys norms.
Conformity to civil society is an economic bad for them. Similarly, pun-
ishment is undesirable as well.
If we have two economic bads, punishment and good behavior, the
direction of preference points inward towards the origin. What may not
be clear is these bads also have corresponding goods, reward and bad
behavior, for the criminal. We can actually represent all four possible com-
binations (punishment/good behavior, punishment/good behavior,
reward/bad behavior, reward/bad behavior) on an indifference map that
represents each of the possibilities in a different quadrant (Figure 1.10)
The indifference curve for the two economic bads is concave. We
rotate the previous diagram 180 degrees and eliminate the quadrants not
applicable to the two economic bads for the criminal to arrive at the fol-
lowing, a series of concave indifference curves, instead of convex, and with
the direction of preference moving inward (Figure 1.11).
The budget constraint normally limits us from going to higher indif-
ference curves but, in this case, it stops us from getting to lower indifference
curves that provide more utility. We have a budget constraint of punish-
ments and rewards used by society to increase good behavior and reduce
crime. The slope of the budget constraint is the persons tradeoff between
Reward
Punishment
Punishment
Good behavior
P*
Punishment
G*
Good behavior
punishment and greater good behavior. The optimal choice for punish-
ment (P*) and good behavior (G*) is derived where the budget constraint
touches the lowest indifference curve (Figure 1.12).
Raising sentences will cause an outward shift of the budget line whereas
making them more lenient will cause them to shift inward. However, alter-
ing the sentence so as to reduce the credit individuals receive for good
behavior will cause a rotation of the budget constraint in a manner consis-
tent with altering the slope without altering the vertical intercept. While
both will unambiguously reduce crime, raising sentences will reduce it
more for some criminals, while altering the tradeoff will reduce it more for
others.
WHAT DOES ECONOMICS HAVE TO DO WITH CRIME ANYWAY? 27
Good behavior
Precautions are not created equal. Some actions (taking ones keys,
locking ones door) merely redirect the thiefs attention elsewhere. It
reduces the probability you will be the victim but does little or nothing to
prevent crime for society. The thief just looks for the easier target. Some
actions are undertaken to increase the likelihood of arresting the indivi-
duals responsible (having Lo-Jack installed). Since the thief increases the
likelihood of being arrested when he steals a car with a system that tracks
the location of the car once activated, this will reduce crime for everyone.
Actions that pay for losses, such as insurance, actually increase crime for
society since once you buy insurance, the insurance company faces the
problem of moral hazard. Once insured, you will not think as much about
taking your keys or locking your door.
From a business perspective as well, criminals look for opportunities.
Distracted salesclerks, labels that can be easily switched, restrooms, and
changing rooms, all provide opportunities to pilfer. But most theft comes
from employees, who know how to defeat the security measures and have a
greater opportunity and access to cause mischief.
less. On the other hand, if she were to have to pay $20 for a pound of
lobster versus $4 for a pound of tuna, she might very well choose the
tuna. She prefers having $16 and a pound of tuna to having no money
and a pound of lobster.
So why is it when she goes to the buffet, you will see her eating both
lobster and tuna? That is due to the law of diminishing marginal utility. At
some point, the more lobster she has, the less she values having more of it.
She will consume lobster only to the point where the next piece of lobster is
equivalent in value to her of something else.
This diminishing marginal utility principle is another important
assumption in how economists view the world. If it were not true, Jennifer
would simply eat lobster and nothing else. Since Jennifer does not do that,
economists reason she nds something else more appealing after having
enough lobster.
As marginal utility diminishes, it has important implications on the
slope of the demand curve. In order to convince someone to purchase
more, the price must be lowered at least on the next unit to be purchased.
This is one rationale for giving quantity discounts. Even for individuals
who would never purchase two items at full list price, few are those who
will balk at the notion of buy one, get one at 50% off. The cynic might ask
why the product isnt sold at a 25% discount in this instance but the rea-
soning is that such promotions will not necessarily work as well. After all, if
the price is reduced on all items, the customers might choose not to pur-
chase the second item at all, potentially leading to lower overall sales and
lower prots. Fewer individuals will still decide to forgo the offer of buy
one, get one free by declining the free item, although the rationale of not
reducing the price has less validity in this case unless the marginal cost of
providing the second item to the same individual is lower than selling it to
someone else. Instead it is so that we can denitely sell two rather than just
one. Still, this is oftentimes a marketing gimmick since you can usually pay
half price for one item in such cases.
What does all of this have to do with crime? Well, if all individuals are
rational in seeking to maximize utility, criminals must do this as well. Most
policies regarding criminality are predicated on the assumption everyone is
rational and respond by pursuing activities less when punishment is
increased and more when rewards are increased. Think back to the year
34 THE ECONOMICS OF CRIME
1985. In order to counterfeit a bill, you still had to have your own printing
press and engrave your own plates. Well, suppose you are contemplating
making and passing a counterfeit bill. Which bill will you choose to coun-
terfeit: a $20 bill, a $10 bill, a $5 bill, a $2 bill, or a $1 bill? The obvious
answer is the $20 bill. There is no greater risk of detection (at least not in
1985 when all bills were essentially the same but for the denomination)
and the rewards are higher. Counterfeiters generally try to counterfeit the
$20 bill as opposed to other denominations because of its high value and
wide acceptance (higher denominations generally invite greater scrutiny or
may not be accepted by businessesthis did not mean that higher
denominations were not counterfeited as well but lower denominations,
especially the $1 bill, were not). What happened when the government
spent more money to try to defend the $20 bill by introducing color-
changing watermarks and embedded strips that identied the bill? All of
a sudden there was a urry of activity to start counterfeiting the next most
widely accepted bill: the $10 bill. Yet you will notice something else about
the bills in your wallet. Take a look at a new $1 bill and one from 1997 or
earlier. Now do the same for any other denomination. While the other
denominations have changed (the most obvious feature is that the picture
of the president is now larger and more off-centered), you will see that the
$1 bill has not changed at all! Why is that? Well, think about it. There is
very little to be gained by counterfeiting a $1 bill: the cost of producing a
counterfeit bill mostly lies in its paper (in fact, it is made of a special cloth-
like paper that resists tearing and is available exclusively to the U.S. gov-
ernment) and much of that paper comes from bleaching $1 bills prior to
printing over them with higher denominations. This is one reason why
bills now have a running strip in them with the denomination spelled out.
These are located at different positions in the bill itself, depending on the
denomination that was originally printed, and cannot be seen unless held
up to the light.
That doesnt mean the government wont put security features in the
$1 bill eventuallyit just wont introduce them rst into this denomina-
tion. After all, even casual counterfeiters (who typically use photocopiers or
laser printers) dont counterfeit the $1 bill due to the cost of color ink (the
one ominous exception are teenagers who use the parental computer to do
soafter all, they arent paying for the ink!).
GARY BECKERS RATIONAL CRIMINAL THESIS 35
to the cult. We know if the benet from something is increased and the
cost remains the same, more is demanded.
In the third case economics has little to say about gender. Women tend
to earn less and draw lighter sentences for crimes and thus, all other things
were equal, we might conclude women would be more likely to commit
crimes. However, gender is a variable that upsets the all other things being
equal assumption and whether men or women are more likely to commit
criminal acts is usually outside the economic realm.
The problem is socioeconomic, psychological, and physiological theo-
ries of criminality cannot explain why well-to-do individuals in society
commit criminal acts. Why would a Martha Stewart engage in insider trad-
ing? Why would Ray Caruthers commit murder? These individuals do not
t the prole the other theories use but economics can explain it: they did it
because they thought the benets they would receive outweighed the risks asso-
ciated with getting caught.
But dont the other theories matter? Yes, they do. Changing the societal
roles of men and women, so that men do not view the use of force as an
acceptable means of getting what they want, would reduce crime. Increased
use of drugs that could alter chemical imbalances in the brain and better
treatment for mental illness are all positive steps in reducing crime. How-
ever, if we choose to ignore the choice component to crime, we do so at our
own peril. Even those who are mentally ill have chemical imbalances, or
who are conditioned to think violence is a proper response to conict will
be more likely to commit crimes when the perceived benets from such a
course outweigh the perceived costs. For those who do not t the prole
suggested by the other theories, only the economic theory of crime can offer a
hope to arrest their criminal tendencies.
car might already have a fairly accurate idea of a cars worth. She might
have less knowledge about a paintings value. The would-be thief has an
expected rate of success. Crimes with a low probability of success are less
desirable. She may receive other non-monetary benets. Perhaps stealing a
car or knocking over a convenience store is a thrill. The more the thief
enjoys this work, the more likely she will engage in it.
On the other side of the ledger are costs. There are several categories of
costs for the criminal. First are direct costs associated with the operation.
This includes payments for equipment, store plans, or even bribes. A clerk
might be bribed to look the other way while the thief pockets an item.
There may be payments to someone to drive the getaway car. Second are
indirect or opportunity costs. While casing a store, the thief cannot simul-
taneously be engaged in gainful employment or leisure activity. The third
type of costs are psychic costs. For most people psychic costs are the largest
reason for engaging in lawful behavior. People may be racked with guilt or
feel a compulsion to obey the law. Breaking the law is far less likely for such
individuals. The fourth type of cost is apprehension-risk cost. The greater
the chance of apprehension, as well as the greater the cost to the individual
of being apprehended, the less likely the individual will commit crime. The
nal cost is expected punishment risk. This is a complicated matter incor-
porating both the subjective probability of being punished by the penal
court system (contingent upon apprehension-risk cost) and the subjective
probability of being punished by the person you are attempting to rob (by
being shot). Thus a law allowing concealed weapon permits increases this
risk, as does a law stiffening penalties for burglary. These are subjective
probabilities because they are in the mind of the perpetrator rather than
being the actual probabilities, which are unknown to the would-be
criminal.
Finally, we have to consider whether the thief is risk-averse, risk-
neutral, or risk-seeking. If she is risk-neutral, a simple cost/benet analysis
can calculate whether to engage in the behavior. If the benets outweigh
the costs, she will do it. If she is risk-seeking, she might engage in some
activities for which costs outweigh the benets: she simply likes to take
risks. If she is risk-averse (as most people are), she will be less likely to
engage in activities unless benets greatly outweigh the costs. Risk aversion
changes with age. As people grow older, they become more risk averse.
38 THE ECONOMICS OF CRIME
This is one reason why older people are less likely to engage in criminal
behavior (they also tend to lose more from the activity and are more likely
to correctly evaluate the true level of risk).
Catherine and Michael are deciding whether to steal cars. Each stands
to gain $2000 from a successful theft. The probability of success is 90%.
Michael receives a thrill from this activity. He is willing to pay $200 for
the opportunity to steal a car. If Michael were working for someone else he
could receive $200 less than Catherine and still be willing to steal the car.
However, since he is working for himself, we think of him as paying
himself $200 to steal the car. This benet accrues regardless of success.
Catherine receives no such thrill. She steals strictly for the money.
The benet side of the ledger looks something like this:
Both use a coat-hanger to open the car door and both know how to
hot wire a car. Therefore, there are no direct costs. Michael faces an
opportunity cost of $300 by taking a day off from his job while Catherine
would have to give up a day at the beach, which she values at $75. Cathe-
rine, unlike Michael, is rather religious and feels guilty about stealing. That
guilt can be negated if she receives at least $400 worth of benet from the
theft. They both think they have a 10% chance of getting caught and, if
they are caught, they believe it will cost them $1000 in court costs and
time. There may be other costs as well (such as the cost of humiliation
from being arrested) but we will ignore these as they only serve to compli-
cate matters unnecessarily. They also believe, if they are caught, they have a
50% chance of being convicted of a crime and being sent to jail for 1 year.
Calculating the expected cost of punishment is more complicated.
Michael will lose $30,000 of income if incarcerated. Catherine faces a loss
of $25,000 in income from a prison term. These are not the only costs
involved. There are psychic costs associated with the loss of freedom. This
will tend to increase the cost of being sent to prison. There are also
GARY BECKERS RATIONAL CRIMINAL THESIS 39
reputation costs that reduce future employability. Such rsum damage can
be far greater in the long run than the cost of lost income from the initial
term in prison. Yet, prison is not entirely a bad deal. One receives free
room and board and an admittedly small wage is sometimes paid for prison
labor. Prison offers the opportunity to acquire new skills that aid in the
pursuit of legal income (through vocational classes) and illegal income (by
mixing with known criminals, one might acquire additional skills and con-
nections that can enhance ones criminal career). Ideally, these benets and
costs must be discounted back to present value, a topic covered in Chapter
1. However, we will assume all additional costs and benets cancel out and
the result is the earlier stated losses of $30,000 for Michael and $25,000 for
Catherine represents the actual present-value cost of punishment.
The cost side of the ledger thus looks something like this:
Both are risk-neutral, so if costs outweigh the benets, they will engage
in the behavior. Thus Michael sees a benet of $2000 and costs of $1,900.
He steals the car. Catherine sees benets of $1,800 and costs of $1,825.
She decides not to steal the car.
What happens if we impose an additional $16,000 ne on those who
are convicted of stealing cars? This will have the impact of raising the cost
of stealing a car by 10% 50% $16,000 = $800. All of a sudden
Michael isnt stealing cars anymore.
What if instead of a ne, we increase the likelihood of apprehending an
individual from 10% to 15%? This is an additional 5% $1,000 + (5%
50% $30,000) = $50 + $750 = $800 penalty on Michael. Raising the
likelihood of apprehension from 10% to 15% has the same effect on
Michaels behavior as imposing a $16,000 ne.
40 THE ECONOMICS OF CRIME
Producing Crime?
You will notice the decision to commit a crime is based on an evaluation of
relative benets and costs. In this section we will examine the question of
how much crime to commit, using the tools that we rst described in
Chapter 1 and adding some new ones.
Criminal activity is often an extramarket activity operating outside the
market mechanism. There is no transaction that we can see between two
individuals in many cases. Instead it is often a choice between two equally
unsavory options. Comedian Jack Benny popularized the notion of a trade-
off with his classic routine that made fun of his persona as a miser. In it, he is
accosted by a robber who demands either your money or your life. A preg-
nant pause ensues when the robber again demands your money or your life,
by which time Benny delivers the classic refrain, Im thinking about it.
GARY BECKERS RATIONAL CRIMINAL THESIS 41
That means you might fall behind in lling orders and lose some sales to
other facilities. If, on the other hand, you noticed an increase in demand
that would continue indenitely, perhaps owing to the unforeseen death of
one of your competitors, you might invest in more expansive facilities.
However, it is unlikely you would do so for a temporary spike in activity.
Normally, if you expand your facilities by increasing all factors of pro-
duction at the same rate, your costs will roughly double as your productive
capacity doubles and per unit costs will remain the same. When all factors
of production increase and production increases at the same rate, it is con-
stant returns to scale. However, if you only hire additional workers or have
opium brought in by special delivery, per unit costs will rise as production
rises. Since per unit costs rise with production when you fail to expand
your facility, economists say you are experiencing declining marginal prod-
uct in terms of labor or capital. In order to produce more, you must be
compensated more for each additional ounce of heroin. Your supply curve
will slope upward.
On the other hand, suppose you expand all of your inputs and your
costs increase at a lower rate than the expansion in your productive capacity
since you were able to negotiate a quantity discount on raw materials or
capital equipment. In such a case we would say you experience increasing
returns to scale because production increases at a faster rate than the increase
in the factors of production. Per unit costs fall.
A third possibility is decreasing returns to scale when production
increases at a slower rate than the increase in the factors of production.
This might occur in criminal activity because more activity means a greater
probability of detection by the authorities. It might not even be worth it to
expand production at all.
markets running along the continuum of illegal to legal markets. The rst
is the market for heroin, the second is the market for rental housing under
rent control, the third is the market for video game consoles, and the fourth
is the market for textbooks.
The sale and distribution of heroin is a classic example of an illegal
black market. According to the CIA, there are roughly 2 million heroin
users in the United States, with approximately 35% being hardcore
addicts. According to the United Nations Ofce of Drug Control, the
global heroin market totals $55 billion and all of it is in the form of cash
payments (to my knowledge, heroin dealers not only do not accept Amer-
ican Express but they also dont take Visa, MasterCard, or Discover) or in-
kind services, which usually consist of sex for drugs. Heroin is big business,
taking in more money than Hollywood does at the box ofce and with
DVD/Blu-ray sales combined.
Making something illegal does little to eliminate its use. Sales of alcohol
did not cease during Prohibition; they simply went underground. If the
government wishes to control sales of illegal drugs, they must go after
either the suppliers or the consumers of the substances. By interdicting
such sales, the government attempts to stem the trade. From the stand-
point of economic theory, the only way to prevent people from consuming
or selling drugs is to cause expected costs to exceed the expected benets
from the activity. Incarcerating drug users (Figure 2.1) will cause a decrease
S
Price
D0
D1
Quantity
in demand for the product. Similar reductions may occur as the result of
increased education about the effects of drug use or be increased spending
on addiction-recovery programs. On the other hand, if we incarcerate drug
dealers (Figure 2.2), it will cause a decrease in supply.
When we incarcerate drug users or otherwise limit demand, we
increase the opportunity cost of obtaining heroin but we also make it less
protable. The decline in price resulting from the reduction in demand is
cancelled by the increase in cost resulting from the possibility of jail time.
The reduction in prot lowers the number of producers in the market and
the decrease in prot reduces incentives for organized crime to enter.
When we incarcerate drug dealers, equilibrium price rises. While this is
due to increased costs associated with the possibility of incarceration, it
also leads to rent-seeking by criminals. By paying bribes to the police, they
can effectively eliminate this penalty and thus receive supranormal prots
while those not under such police protection will be going to jail. In
corrupt regimes, there is never a lack of enforcement actions but the mixing
of criminal elements and law enforcement effectively ensures the trade not
only is not eradicated but organized crime will enter or persist in the mar-
ket. We will return to the drug market in Chapter 4 on organized crime
and Chapter 5 on victimless crime.
When a jurisdiction legislates rent control, housing becomes a black
market where the product itself is legal but the mechanism for transmission
S1
S0
Price
Quantity
is restricted. There now exists an inefcient legal market side by side with a
black market. This inefciency is represented by the area called deadweight
loss. It is that which is lost to society that goes to no other individual.
Suppose a hurricane hits your area and the cost of getting water goes up.
Not to worry, I am from the government and I am here to help you! I
forbid selling water for more than the price that it was before the hurricane.
Great idea, right? Wrong! The problem is it might cost more to bring in
water from outside than merchants can receive in payment. Now no mer-
chant wants to sell water and everyone wants water. If the government
stayed out of the market, the people who really wanted the water would
be willing to pay more money for it and the market would nd an equi-
librium where everyone willing to buy at the market price and sell at the
market price could engage in trade. But that doesnt happen now! Instead,
we have a lot more people demanding water and a lot fewer selling it.
Returning to rent control, the imbalance caused by this law, along with
resulting deadweight loss is illustrated in Figure 2.3.
P is the price and Q is the quantity prevailing in the absence of rent
control. P* is the price set as the rent ceiling, the amount over which no rent
can be charged. Q1 represents the number of units offered and rented under
rent control. The number of rented units will be fewer than would prevail
under a free market but it would appear the price that each person would
pay would be lower. However, while the former statement is true, the latter
P1
Rent ceiling
P*
Q1 Q Q2
is not. At the price, P*, there are a number of people who will wish to rent
but who will be unable to at the market price. Demand for units will be Q2
and the number of people shut out of the market would be Q2 Q1. Many
of these individuals would be willing to pay above the rent control price. If
we restrict supply, the actual rent paid will be P1 and not P*. You might
wonder how this can be when there is a legal rent ceiling but there are many
ways people will pay for something without paying money for it.
First, since there are fewer units available, search costs will increase. Con-
sider what happens when you hear about a sale going on across town. Sup-
pose you nd you can save $0.50 on lemonade if you drive ve miles to get it
instead of going to the stand across the street from your house. Are you going
to do it? How about if you save $200 on a computer? Alternatively, suppose
you are standing before two lemonade stands. One is selling lemonade for
$1.00 and the other for $0.50. There is no other difference between the two
stands and there are no lines. Isnt it clear while you will go for the less expen-
sive alternative in this latter case, you are unlikely to drive ve miles across
town for the benet (assuming that would be the sole reason for going to the
location that is further away). Yet we are willing (in most cases) to make such
a trek to save signicantly more money. Now think about housing. With
fewer units available, it isnt simply a matter of traveling a greater distance; it
might be that with fewer units available, it is going to take longer to nd your
desired apartment. Even if this isnt the case for you, some people will take
longer to be able to nd an apartment or else will be taking apartments they
nd less desirable than they would in a free and fair market.
Second, apartments might come with restrictions. Perhaps landlords
will not allow pets. Maybe they cut back on incentives. No longer will a
refrigerator be offeredthe tenants will be expected to provide it them-
selves. Utilities might have been included before and now are not. These
factors will drive up the actual price of housing.
Landlords might do less upkeep on their units or might discriminate
against certain types of individuals. They might prefer a white-collar pro-
fessional instead of a college student because they worry about parties or
excessive cleanup after the student leaves. They might ask for higher clean-
ing deposits and retain a greater proportion of such deposits. Unscrupulous
landlords might even demand bribes before renting. Such illegal agree-
ments are made in the context of a black market.
GARY BECKERS RATIONAL CRIMINAL THESIS 47
Leaving aside the question of rent control, we now turn to goods that
are legal when sold in one jurisdiction or to one group of individuals but
not another. The market for video games is a classic example of such a
market. Certain game consoles, such as the Xbox and PlayStation 2, were
deemed subject to export controls and could not be sold to certain coun-
tries because the computer chips could be harvested from them for use in
military equipment such as missile guidance systems. Various games, such
as Grand Theft Auto, cannot be sold to minors in certain jurisdictions. The
effect of such restrictions is to create a black market but of a different sort.
Since some individuals can still purchase the goods, there is only a small
suppression of demand. Instead, people will purchase the goods in the legal
markets and then sell them in the illegal markets at a markup to account
for the potential cost of getting caught.
We begin by assuming the two markets operate in a world without
transportation costs, price restrictions, or export constraints. Before one of
the markets is declared to be an illegal one, prices in both markets are
identical at the worldwide price (Figure 2.4).
When the product trades freely and without restrictions on transferring
products between the two markets either legally or economically, the price
is the same in both markets (if it were higher in one market than another,
goods would move from the market with the lower price to the market
with the higher price, causing a rise in price in the former market and a
lowering of price in the latter until the two markets once again had the
same prevailing price). However, circumstances change after the product
is declared illegal in one market (Figure 2.5): it will still trade at the world-
wide price in the legal market but it now trades for the worldwide price plus
a smuggling premium in the second market. We have also reduced demand
S
S
Worldwide price
D D
S
S
Worldwide price
Smuggling
premium
D D2 D1
Legal market Illegal market
Price difference
due to quality
Price
differences
Price difference
due to market
segmentation
As arbitrage occurs (Figure 2.7), price and quantity sold in the inter-
national market will rise, due to an increase in demand as the arbitragers
buy more and more goods. The price and quantity sold in the U.S./Cana-
dian market falls due to lower demand for new domestic editions. Stu-
dents who formerly bought domestic editions now buy international
editions. It is important to note the price in the international market may
not rise by as much as the price in the U.S./Canadian market falls (or,
conversely, it may rise more than the price in the U.S./Canadian market
falls). The degree to which price changes depends on the slope of the
supply curves in both markets with atter supply curves resulting in lower
price changes than steeper supply curves.
With the gray market, the impact on the rms eventual prots is the
reduction in prot due to market segmentation elimination. Higher
income in the international market only partially compensates for lower
revenue from the U.S./Canadian market. A prot-maximizing rm that
can earn more money by selling the same product at the same price will
do so and thus not engage in price discrimination. One difference between
gray markets and black markets that coexist with legal markets is that price
converge only occurs with gray markets. Black markets do not see prices
converge because the selling activity itself is illegal and thus commands a
pricing premium.
The effect on domestic sales of pirated or counterfeited products is a
reduction in total sales and lower prices. In this case, products are not trans-
ferred from one market to another. After all, pirated or counterfeited goods
S
S
Price falls
Price
Rational Murder
Murder appears to be irrational: how can killing someone be reduced
to a pleasure/pain calculus? However, let us look at why people mur-
der. One motive is nancial. If one looks at murder for prot, the
economic approach ought to make sense and, if we increase the likeli-
hood or severity of penalty, there ought to be fewer murders. At the
same time, if the likelihood or severity of penalty falls, we should see
more murders.
Evidence supports this. Murder clearance rates (the rate at which mur-
ders are solved) have actually fallen quite dramatically over time. In the
early 1960s, the murder clearance rate in the United States and Canada
was near 90%. By the early 1990s, the U.S. rate had fallen to the mid-
60%, where it has remained since. The murder clearance rate for Canada
has seen a similar trend but it has not fallen as precipitouslythe clearance
rate for murder tends to be about 10% higher than in the United States. A
falling murder clearance rate, all other things being equal, should increase
the number of murders. In the early 1950s and the 1960s, the murder rate
was quite low, even lower than today in both countries. By the late 1980s
and the early 1990s it had risen dramatically while clearance rates had
fallen. However, when clearance rates stabilized, the murder rate started
to fall. Thus the murder-rate rise and the clearance-rate drop appear to be
52 THE ECONOMICS OF CRIME
related: when people nd they are less likely to be caught, they tend to do
more illegal activities.
At the same time, we can look at the effect of capital punishment.
Higher murder rates were rising before the death penalty was eliminated
in the United States in 1972 and also rose for several years after it was
reintroduced in 1976. Yet between 1972 and 1976, murder rates did not
show a trend. Neither did clearance rates during that time period. Clear-
ance rates appear to have a more profound impact than the ultimate
punishment.
Does that mean capital punishment is not a deterrent? The evidence is
mixed. Capital punishment is by no means a certain event. Despite over
700,000 murders since the death penalty was reintroduced in the United
States in 1976, less than 1,400 people have been executed since then. As of
August 2013, there are 32 states covering two-thirds of the population of
the United States that have the death penalty. Only about 3,200 indivi-
duals are on death row. Even Texas, the capital punishment capital of the
United States, has seen only 500 executions but over 60,000 murders since
1976 and currently it has only about 300 people on its death row. Not all
will face execution. Even if one makes it to death row, it can take several
years for the sentence to be carried out and, in many states, a death row
inmate is more likely to die of natural causes than to be executed. A death
sentence is not going to be much of a deterrent if it is to be carried out
several years in the future and if it is an extremely unlikely event from the
standpoint of probability.
At the same time, we have a signicant number of individuals who do
believe that it has deterrence value. If, among those numbers, there are
people who might commit murder, then the death penalty will have a
deterrence value for those people.
The economic theory of crime suggests the death penalty is seen as a
more severe penalty than life imprisonment. But it has to be used to be
effective. The actions of those on death row attempting to stave off execu-
tion give testament to the fact that, for many people, this is true. Inmates,
such as Gary Gilmore, the rst individual executed in the United States
after the death penalty was reintroduced, who accept or even seek the death
penalty are few and far between. At the same time, evidence that the death
penalty acts as a deterrent is mixed. Even though it deters some people,
GARY BECKERS RATIONAL CRIMINAL THESIS 53
once a murder is committed, what stops people from killing again? Cer-
tainly moral considerations may come into play but the threat of punish-
ment no longer hangs in the balance unless either the likelihood of capture
or sentence is increased as a result. The constant media circus and the
transformation of killers such as Jessie James into folk heroes can result in
signicant utility being gained from such killings by those who crave atten-
tion. Since this media frenzy is typically greater for those convicted of the
death penalty, it might offset or even overturn the deterrence effect in some
individuals. We will further discuss murder as a rational act in Chapter 7.
Rational Addiction
In discussing supply and demand, I made the comment that there is some
dispute as to whether preferences are stable or subject to change. Many
economists argue preferences are stable but this is not a requirement for
the use of economic theory. In this section, we contrast the economic
approach and the constructive processing approach.
Traditionally, the economic approach assumes people have stable pre-
ferences. This creates a need to explain advertising. In two classic articles,
Nelson1 argued advertising was information and, therefore, as consumers
watch advertising, they become better informed about products and, thus,
are better able to make appropriate purchasing decisions. Consumer tastes
do not change; information about products increases. In acquiring more
information, buying patterns change. What we see as a change in prefer-
ences is simply the problem of measuring the wrong variable. Goods that
are advertised are, for the most part, legal goods: the exception being the
advertising of goods that are legal in the jurisdiction where the advertising
is placed but illegal in the jurisdiction where the advertising is read. As
such, advertising from the standpoint of crime is typically informational
in context: public service announcements detailing how one can report
crimes or nd missing children t this description.
This information may be helpful or harmful; it might contain lies and
appeal to us through suggestion. There is good reason why cigarette com-
pany advertisements once contained images of healthy young individuals
smoking: companies were attempting to counter health warnings on their
packages. Similarly, beer commercials use sex; car commercials use rugged
54 THE ECONOMICS OF CRIME
individualism; and soft drink commercials use popular culture (you are
with it if you drink their product).
These issues are addressed in a separate argument, which is de gustibus
non est disputandumthere is no use arguing about matters of tastes.
Most economists dont argue tastes are immutable; they simply argue we
can treat tastes as if they were immutable. Some economists even go so far
as to claim that tastes not only do not change within individuals but are
actually the same across individuals. Stigler and Becker2 in their classic arti-
cle that uses as its title the aforementioned Latin phrase, argue it is differ-
ences in human capital (including education and work experience) that
account for differences in behavior. In other words, the reason why people
differ in tastes of music, art, or literature isnt because of different prefer-
ences but instead because their human capital (for example, a college edu-
cation) provides complementarities that lead them to partake of such
things. Most economists reject this extreme position but still want to main-
tain the notion preferences are stable within individuals. The fear is if pre-
ferences are alterable, the rational actor model will be unable to explain any
behavior.
With stable preferences, however, one must be able to explain addic-
tion. Becker and Murphy3 argue people might rationally choose to
become addicted to drugs or alcohol. Addiction is characterized by both
reinforcement (consumption in the present raises consumption in the
future) and tolerance (the level of consumption necessary to obtain the
same level of satisfaction increases over time). In the case of harmful addic-
tions, there is an increasing toll taken on the individual. This tends to
increase the price of the good over time. Also, as an individual gets older,
her time horizon shortens. Individuals do not live innite lives and thus
the potential future damage from the good declines over time. As we
learned in the last chapter, individuals discount future costs and benets
to the present. In such cases, the price of the good may rise over time if the
damages increase at a rate faster than anticipated by the individual when
they took up the addiction or it may fall if damages fail to increase at the
anticipated rate.
The rational addiction model makes predictions conrmed by research.
It is more likely smokers suffering a heart attack will quit because they are
now aware of the greater cost associated with their addiction than if they
GARY BECKERS RATIONAL CRIMINAL THESIS 55
were to simply wake up one day and decide not to smoke. Similarly,
changes in family situations such as the birth of a child will raise costs of
such damaging behavior and precipitate a change.
Those who live more in the moment are more likely to become
addicts since their short-term pleasure exceeds the benets from long-term
abstinence. Stress increases the likelihood of addiction because many of
these harmful addictions can alleviate short-term stress. Stress also tends
to alter shorten time preferences, making addicts see the world through
a short-term lens. Greater income brings with it both greater availability
to purchase harmful goods but also increases the cost of taking them
because many such goods are debilitating or are illegal. Thus, the impact
of income is indeterminate.
In recent years, Becker4 has moved to a position that semantically
stays within the preferences are immutable framework but is, for all
practical purposes, an acknowledgment they are not. He does this by
dening an underlying utility function he says is immutable, consistent,
and identical across all individuals and all times. He then argues each
individual at varying times has a subutility function that causes her
behavior to differ because of differences in personal experiences and past
consumption (referred to as personal capital) and in peer pressure and
culture (referred to as social capital). As such, consumption patterns
and decisions by peers and the individuals themselves cause the utility
derived from engaging in a particular action to differ. It is a return to the
imperfect information argument. The reason why people differ in
behavior is because experiences are different and these differences in
experiences alter prices individuals pay for goods. This implies the price
you pay is not the list priceit is the list price coupled with the oppor-
tunity cost you pay to consume the good. It is the opportunity cost and
not the list price that is altered by past experiences. This allows Becker to
conclude only prices and income, and not tastes, are affected by addic-
tion and advertising. He uses a similar approach to discuss fashions, fads,
and habits.
However, the rational actor model does not need stability of prefer-
ences to be worthwhile. It merely postulates preferences tend to be stable
when aggregated over individuals over a short period of time or, to the
extent preferences do change, there is an ability to scientically predict
56 THE ECONOMICS OF CRIME
Differentiating we get:
EU = pU (W L) + (1 p)U (W + G ) [2.3]
Beckers original model did not include a parameter for wealth but
our model has such a parameter. This is important because the level of
wealth a person has might inuence her decision to commit criminal
activities. The individual will commit the crime if her expected utility
from the gamble exceeds the risk-free equivalent. Thus, if EU > EU
(W), the person will engage in criminal activity. The decision to commit
crime will depend on the level of her risk aversion, U(*). If someone is
GARY BECKERS RATIONAL CRIMINAL THESIS 61
D
U(W+G)
B
U(W)
C
A
U(WL)
WL W W* W+G
EU
= pU (W L) < 0 [2.4]
L
62 THE ECONOMICS OF CRIME
EU
= U (W L) U (W + G ) < 0 [2.5]
p
These values will be negative so long as the marginal utility from wealth
is positive, the overall level of wealth is positive, the loss incurred is nega-
tive, and the gain from the crime is positive. All of these are standard
assumptions. Of course, if the person believes punishment is actually a
benet, increases in punishment level may actually promote criminal activ-
ity. Such individuals are thankfully rare. Since expected utility declines
under normal conditions with increases in likelihood of punishment or its
severity, the likelihood of criminal activity will similarly decline.
With regard to the gain from crime, as it increases under these same
assumptions, the level of crime will increase:
EU
= pU (W L) < 0 [2.6]
L
EU
= pU (W L) (1 p)U (W + G ) [2.7]
W
1 p U (W L)
< [2.8]
p U (W + G )
GARY BECKERS RATIONAL CRIMINAL THESIS 63
However, if
1 p U (W L)
> [2.9]
p U (W + G )
is 5, while playing top will only net row 2. If column plays right, row will
also play bottom because the payoff for row from playing bottom is 6,
while playing top generates only 3. When a strategy will always be
employed no matter what the other side does, it is referred to as a
dominant strategy. Therefore, row has a dominant strategy of bottom.
When a pair of strategies exists such that rows choice is optimal given
columns choice and columns choice is optimal given rows choice, we
have a Nash Equilibrium, named after John Forbes Nash, Nobel Laureate
in Economics in 1994. An example of a game with a Nash Equilibrium is
found in Table 3.2.
Using arrows, we can show how column and row will react to each
other. Suppose row plays top (Table 3.3). Column can choose either left
(payoff of 1) or right (payoff of 0). Since left has the higher payoff, column
plays left. We place an arrow showing left instead of right by putting a
left-pointing arrow between left and right in the top row.
We will now complete the diagramming of the game (Table 3.4). Next
we assume row plays bottom. Column will play right because 2 (the payoff
for playing right) exceeds 0 (the payoff for playing left). Assuming column
plays left, row will play top because 2 (the payoff to row of playing top)
exceeds 0 (the payoff to row of playing bottom). Similarly row, assuming
Row
Bottom (0,0) fi (1,1)
column plays right, will play bottom (because the payoff of 1 for playing
bottom exceeds 0 from playing top).
Notice how the arrows collide at the points top left and bottom right?
When the arrows collide onto a particular quadrant of the payoff matrix
means we have found a Nash Equilibrium. Thus, the two Nash Equilibria
in the aforementioned table are top left and bottom right.
Here is a game (Table 3.5) with only one Nash Equilibrium, that being
top left.
Table 3.6 is a game lacking a Nash Equilibrium. The arrows just go in
circles.
68 THE ECONOMICS OF CRIME
Prisoners Dilemma
In competitive market situations, there is little need to analyze strategic
effects. The best response from each player generates a Pareto Optimum.
A Pareto Optimum occurs when no one can be made better off without
making someone else worse off. It occurs when no further trades are
desired or possible. A choice to trade made between two individuals occurs
when each side values the option offered by the other person more than the
item that they are giving up in return. Thus both sides benet from trade.
If you did not benet, you would presumably not trade. On the other
hand, the prisoners dilemma is a game where the Nash Equilibrium is not
a Pareto Optimum.
Suppose Jeffrey and Angela are arrested at the scene of a crime. They
are taken to separate interrogation rooms to be questioned. Each is given
the opportunity to confess in exchange for a lesser sentence, a procedure
known as plea bargaining. Each knows if the other person confesses, the
other person will be a prosecution witness. Although the actual sentence
each will receive and whether each will be convicted is unknown, it is prob-
ably reasonable to expect having ones partner in crime testify against you is
GAME THEORY AND THE VICTIM/PERPETRATOR CALCULUS 69
a good indication you will be convicted. We will assume Jeffrey and Angela
know the following to be true: if both keep silent, the district attorney can
only convict them of trespassing, a misdemeanor requiring each to spend
1 year in jail. If both confess to breaking and entering, a felony, there will
be no trial and each will be sentenced to three years in prison. If one keeps
silent and the other person confesses, the silent one goes to prison for the
maximum sentence of six years, while the one who turns states evidence
will not be prosecuted as a reward for assisting the prosecution. What
happens?
Each of them reasons in the following manner: Suppose my partner
confesses, what should I do? If I confess, I get 3 years in prison. If I fail
to confess, I get 6 years in prison. Since 3 years in prison is better than 6
years in prison, I should confess if my partner confesses. Of course, I
dont know if my partner will confess. So, I need to think about what will
happen if my partner stays silent. If my partner stays silent and I confess, I
dont go to jail at all. On the other hand, if my partner stays silent and I
stay silent, I get 1 year in jail. Since not going to jail is better than going to
jail, I should confess. Therefore, since no matter what my partner does, it is
better for me to confess, I will confess all of the time. It is a dominant
strategy. Thus, both confess, so they both go to prison for 3 years. Notice
that if both refuse to talk, they receive just one year in jail, which is better
than if they follow their dominant strategies! What prevents them from
doing so is not only the uncertainty about what the other person will do
but also the incentive to defect from that strategy for their own gain. We
will show how this is solved using the arrows method in Table 3.7.
The Nash Equilibrium is for both to confess, while there is a Pareto
Superior position (both keeping silent). In this case, two individuals, both
working toward their own best interests end up with a solution that is not
favorable to either of them. Indeed, altruism (keeping silent) is a Pareto
Superior solution but how do we get there when everyone is a utility max-
imizer? After all, the district attorney is not allowing a trade to occur.
Possibility #1: Alter the payoffs.
If we make confessing sufciently more expensive (by killing the
others family if they talk), we can ensure silence. Alternatively (or con-
jointly) we can make keeping silent more rewarding (by providing money
to the others family if they keep quiet).
Possibility #2: Repeating the game an innite number of times.
This works if we repeat the game an innite number of times and
employ the tit for tat strategy: we agree to stay silent as long as the other
person also stays silent. The most the other side can exploit you is one time.
However, in a one-shot game or in a game with a nite and known number
of rounds, one time is enough. If we know the game will be played
10 times, we will both defect (confess) on round #10 without retribu-
tion. Similarly, if you know I will defect in round #10, then you should
defect in round #9 but then since you will defect in round #9, I should
defect in round #8, etc.
Possibility #3: Repeat the game allowing it to end with a probability on
any round.
It turns out we dont need to do this an innite number of times, just a
potentially innite number of times. If it is possible that the game will con-
tinue each time, the fact it will eventually end does not preclude everyone
from acting as though it will not.
Reputation
Reputation can play a role in how criminals and victims interact. Victim-
ization surveys show those who are victims in the past are more likely to be
victims in the future. They are also more likely to take steps to reduce their
likelihood of victimization. Bullies in a playground pick on the weakest
kids to extort lunch money. They do this precisely because these are the
individuals who are least likely to resort to violence in kind. At the same
time, if violence must be used, the probability of success is greater against
weaker victims. The bully mentality may be to perpetrate an image of
GAME THEORY AND THE VICTIM/PERPETRATOR CALCULUS 71
Dynamic Games
Similarly, when you consider the interaction between burglars and property
owners, we see actions are mutually determined and not independent of one
another. We also see interactions are dynamic, not static. A typical response
to an increase in criminal activity is an increase in protective activity: more
burglar alarms and burglar bars are installed. The increase in cost associated
with trying to burglarize homes results in a drop in crime. However, that
drop in crime promotes an opposite effect: a decrease in protective activity.
This, of course, results in an increase in crime and the cycle is continued.
You might think adding police to the equation would make criminal
activity decline. Maybe, but maybe not. An increase in policing decreases
72 THE ECONOMICS OF CRIME
Reporting a Crime
Catherine Kitty Genovese was returning home from work at around
3:15 in the morning of March 13, 1964. She had parked her car and was
less than 20 feet away from her apartment when she was attacked by
Winston Moseley, who repeatedly stabbed her while she screamed for help.
Several neighbors heard the commotion and turned on their lights and at
least one man, Robert Moser, called out to the attacker to leave her alone.
Moseley quickly left the scene but returned a few minutes later before
Genovese, who was now struggling to stay conscious, could open the
locked apartment door. A struggled ensued and again she cried for help.
As neighbors came to their windows, he left her again. He soon returned
and proceeded to rape her and completed the murder at 3:47 in the morn-
ing, earning the princely sum of $49 for his efforts. At around 3:50 in the
morning the rst call to the police came from Karl Ross who had been
debating whether to even make the call. Arriving less than 3 minutes later,
the police found the dead body of Genovese, which had been stabbed at
least 17 times. No fewer than 38 people witnessed or heard parts of the
brutal attack as it occurred.
Only one person reported the crime and he only did so after 35 minutes
had elapsed since the initial assault. This is characteristic of a free rider
effect. Many individuals felt someone else was going to report the crime so
why should they bother? A similar occurrence happened to me in Boston.
I heard a crash and when I went to investigate, I saw a bicyclist lying on the
ground motionless, the victim of an apparent hit and run. Not having a cell
phone, I ran off to nd a public phone, which I found about 5 minutes
later, and placed a call to the 911 operator. When I returned, the bicyclist
was still on the ground and a group of observers had surrounded him. By
the time police arrived a couple of minutes later and started interviewing
people, it became apparent the only 911 call came from me, even though
GAME THEORY AND THE VICTIM/PERPETRATOR CALCULUS 73
several of the bystanders had cellphones, saw the actual collision take place,
and gave the police a description of the suspect who had ed.
The free rider problem occurs whenever the individual believes they
can get something for nothing because someone else will pay the cost.
To understand how this works and why having more people at a crime
scene will actually lower the probability any one of them will report it,
consider the scenario given in Table 3.8. We begin with two witnesses:
There are multiple Nash solutions. With no dominant strategy for either
player, the best response depends on what each believes the other will do.
Both receive more benet than the cost of reporting the crime because if the
other person fails to report the crime, they will want to report it. With only
one witness, there is an incentive to report. Yet, as the number of witnesses
realizes that since all benet equally from having the crime reported but the
cost of reporting falls only on the individual who reports, it is not wise to
report crimes others will report. It only takes one call to bring out the police.
Multiple calls might only serve to clog up 911 lines, preventing other emer-
gency responses from occurring. Since each person rationally gures someone
in the crowd will report the crime, they each decide not to report. As the
number of individuals increases, the probability any particular one of them
will report the crime falls. Of course, the probability of multiple reports
increases with an increase in the crowd numbers as well.
from the public goods benets. The latter means when one person uses the
good, it doesnt diminish the ability of another person to enjoy it.
The action of reporting a crime is a public good: the benets (police
response) are provided no matter who makes the call and the resultant
investigation benets everyone in the public at large (with the exception
of the criminal!). If two people are neighbors, it doesnt matter which one
calls, both benet from the action undertaken. The fact that one benets
does not diminish the benet the other person receives.
Similar outcomes occur with other kinds of public good. A lighthouse
ensures ships at sea do not run aground; no one can be excluded from using
its services. The lighthouse cannot refuse service to one ship while simul-
taneously allowing a second ship to use its beacon. It provides the service to
both or neither (it is possible to turn the lighthouse off whenever contract-
ing ships are not around, but that is easily defeated by having the ship wait
around for a contracting ship to approach and tail that ship so as to benet
from the use of the lighthouse). The fact that one ship is using the light-
house does not diminish the benet that the other ship gets. Both benet
from not running their ships aground.
Everyone uses the benets, but not everyone pays the fair share. If it
were easy to get people to pay what they ought, there would be no need for
laws against tax evasion.
choice will be Top and Columns choice will be Left. If there is no Nash
equilibrium, does it matter who plays rst? Let us switch the players so
Column goes rst and Row goes second. The only thing we will have to
change is we need to put the payoffs for Row second instead of rst in this
case. This means the payoff from Left and Bottom becomes (0,8) instead of
(8,0), as the payoff to Row is 8. This game is represented in Table 3.13:
Column is left with the choice between playing Left (and getting 0)
and playing Right (and getting 3). Column plays Right and Row plays Top
yielding 3 for each player. Yes, it matters who plays rst.
How does this relate to crime? A classic game is known as the kindly
kidnapper, (Table 3.14) who decides not to kill the person he has just
ransomed. Suppose a kidnapper successfully ransoms someone for
$100,000. What prevents them from killing the victim? The victim might
be blindfolded so as not to see the face of the kidnapper. If the kidnappers
identity is protected, it might make sense to release the victim, especially if
the police are less likely to pursue a case of simple kidnapping than of
murder. However, if the mask has come off and the kidnapping victim
can positively identify the kidnapper, it all changes. The kidnapping victim
GAME THEORY AND THE VICTIM/PERPETRATOR CALCULUS 77
can state all she wants she will not turn in the kidnapper. However, her
response is simply not credible. The kidnapping victim will identify the
kidnapper to the police.
Since the kidnapper knows the victim will turn him in (the victim
wants to recover the $100,000 that was paid in ransom), the kidnapper must
decide which is worse: killing the victim, resulting in a feeling of remorse
(remember the kidnapper is kindly), or letting the victim go free, which will
leads to the kidnappers capture. The kidnapper soon comes to the conclu-
sion the homicide is justiable, even if it does prove gut-wrenching. The
subgame perfect equilibrium is for the kidnapper to kill the victim (see
Table 3.15).
The kidnapper must nd a way to threaten the victim after releasing
her to ensure she doesnt go to the police. It must be a credible threat in that
doing it is in his best interest. There is an option: photograph the victim in
a series of compromising poses and threaten to release the photos if the
victim turns him in. The kidnapper has now committed another crime
(blackmail) but it is far less damaging than murder. Provided the victim
cares more about preventing the release of the photos than getting back the
ransom money, the scheme will alter the payoffs as shown in Table 3.16.
The payoff from turning in the kidnapper (500) is less than the payoff
from keeping silent (100), so the victim stays silent. The kidnapper com-
pares the payoff he gets from releasing the victim (100) with killing her
(100) and realizes it is better to release her.
78 THE ECONOMICS OF CRIME
The actual payoff does not matter: only rank order matters. If one
payoff exceeds another, the larger payoff wins. I could have used 100 or
100,000 as the payoff for the kidnapper. All that matters is that the kid-
napper receives more benet when the victim stays silent than when the
victim talks to the police and the kidnapper receives more benet from
killing the victim than if the victim talks. Similarly the kidnap victim must
receive more benet from being released than being killed (fairly obvious).
The victim must also receive more benet from going to the police than
keeping silent in the absence of incriminating pictures. Finally, the pictures
must alter the payoff so the victim no longer has an incentive to go to the
police (otherwise the kidnapper will still execute the victim).
There is another reason to not kill victims. If kidnappers kill too many,
everyone might gure out they arent getting back the victim, so why pay?
However, this reputation is a public good for kidnappers in general since
no one can identify the actual kidnapper, so we are back to an incentive to
free ride and kill the victim anyway.
Credible Threat
Corporate managers face a Prisoners Dilemma scenario in many countries
where corruption is rampant. If they make payments, they end up losing
far more in the long-run because they reinforce bad behavior on the part of
corrupt ofcials. Short-term gains extracted from making payments are
almost always cancelled out in the long-run by the reputation for being
a pushover. United States companies are faced with a dilemma: share-
holders demand quarterly results. So, going for the quick x is in their best
interest. In the absence of external force, each business bribes the ofcials
and all this will do is increase costs.
Businesses need something akin to what was needed by the kindly kid-
napper: they need their refusal to pay a bribe to be a credible threat. In this
GAME THEORY AND THE VICTIM/PERPETRATOR CALCULUS 79
case, they can turn to the government to be the external enforcement agent
to solve this coordination problem. In the United States, the Foreign
Corrupt Practices Act of 1977 does exactly that.
The act generally prohibits U.S. companies and individuals from
paying bribes to foreign ofcials to obtain or retain business. Enforcement
falls to the U.S. Department of Justice and the Securities and Exchange
Commission. Companies must keep strict accounts of transactions to for-
eigners to ensure bribes are not mischaracterized as legal payments. Paying
bribes can result in large nes for corporations, including disgorgement of
prots, and imprisonment and nes for individuals who are caught.
This legal instrument changes the calculus of business executives in
their interactions with foreign ofcials. While before the cost was the bribe
and the benet was the contract, now the cost includes possible imprison-
ment and nes by the U.S. government. Foreign ofcials may still ask for
bribes but U.S. businesspeople will be less likely to pay.
The third allegation is the solutions follow directly from the specica-
tions. This is true. If the specications are faulty, the games will be such as
well. The prisoners dilemma results in a situation where both players con-
fess yet both do worse than if they keep quiet. Invariably there are those
who will cooperate even if the other side constantly defects. This does not
mean game theory is broken. It merely suggests the actual payoffs of a
particular individual are not those generated in the game and there are
additional factors the modeler failed to take into consideration that cause
reality and the model to diverge.
techniques like witness protection programs for the person and his family
or increased payoffs). A second option is to raise the cost of staying silent
by increasing penalties if someone is charged with being part of a crim-
inal organization.
Jamaica
Criminalize (100,50) (0,0)
CHAPTER 4
Organized Crime
In the United States, organized crime is, even with the introduction of the
Racketeering, Illegal, and Corrupt Organizations (RICO) Act, the bane of
law enforcement. It has been accused of turf wars, leading to the slayings
of innocent bystanders, and is a source of corruption in the civil service of
various municipalities.
Organized crime tends to ll in where government fails to govern.
Repressive regimes rarely have problems with organized crime. The Russian
Maa only gained prominence after the collapse of the Soviet Union and the
Taliban was highly successful in controlling the opium trade in Afghanistan.
At the same time organized crime often works with corrupt government
ofcials in a self-reinforcing web of corruption.
One useful aspect of being involved in organized crime is one can lever-
age the power of the state to reduce competition. When nascent rival orga-
nizations attempt to encroach on their turf, a few well-placed phone calls
will often mysteriously appear at police headquarters and the market
entrant is quietly dispatched and denied entry. This assistance does not
go unappreciated by the police. Beat cops are frequently courted and paid
off with monetary bribes and assistance is solving non-organized crime as a
policy to ensure a successful criminal enterprise. Being in a criminal orga-
nization may enable criminals to increase payoffs from crime and decrease
losses.
The need to reduce transaction costs motivates the formation of such
organizations. Playing on the concept of family, the development of elabo-
rate rituals, intermarriage within the group to interlock relationships, and
the extension of tentacles of the criminal organization into every aspect of
the lives of its membership enables it to build trust in an inherently low or
no-trust business. It may be one keeps ones friends close and ones enemies
closer but these relationships allow for exertion of leverage on an unparal-
leled scale. When your brother-in-law is also your partner in crime, it is more
difcult to turn states evidence and when it is politely suggested your elderly
mother might become fall victim to a tragic accident, you tend to cooperate.
The pronouncement of Sean Connerys character on how to deal with
Capone in the movie, The Untouchables, could just as aptly refer to the way
you deal with all maas: He pulls a knife, you pull a gun. He sends one of
yours to the hospital, you send one of his to the morgue. Thats the Chicago
way.
One interesting twist is criminal enterprises no longer work simply in
the shadow realm. They own legitimate businesses as well. The romantic
notion Bugsy Malone wanted the Maa to go legit through establishing a
beachhead of legal gambling in Nevada is only partially false. Producing
legal income serves as an effective defense against the tax evasion charges.
Capone was brought down for living like a king while never paying income
taxes. By producing a stream of legal stream of income, these businesses
provide two functions: rst, they assist criminal organizations in their
attempt to legitimize their prots and, second, they allow for money laun-
dering of various forms.
ORGANIZED CRIME 91
Price Discrimination
However it achieves it, organized crimes principal characteristic is its
monopoly power over an illegal industry or industries within a well-dened
area, whether as a single entity or a group of entities working as a cartel. If it
operates as a cartel, there is the possibility of cheating to gain higher
prots. This later form is probably more characteristic of organized
crimes structure but, for the purpose of this section, we will assume
enforcement of agreements both tacit and explicit regarding quantity and
pricing of illegal goods and services can be accomplished whether through
extrajudicial negotiation or by the ultimate in negotiating tactics: murder
and assassination.
It shares with all monopolies the fundamental characteristic that to
ensure high protability, it is often necessary to engage in some form of
quantity restriction. The irony is organized crime might reduce crime,
leading us to speculate the absence of organized crime, that being disorga-
nized crime, might be more painful in the long run.
To understand this, we return to price discrimination rst broached in
Chapter 2. There are four types of price discrimination: perfect price dis-
crimination (or price discrimination in the rst degree), second degree
price discrimination characterized by quantity discounts, third degree price
discrimination characterized by group discounts, and the hurdle model of
discrimination, found where a barrier is placed in front of individuals who
must decide to hurdle the barrier to get the discount.
Under normal, non-price discrimination, circumstances, a single price
is paid by all individuals for the same product. Price discrimination changes
this. With perfect/rst degree price discrimination, everyone pays a different
price, called the reservation price, equal to the maximum possible price each
is willing to pay. Normally it is difcult, if not impossible, to establish such
prices, but the tactics of organized crime make it more likely such a favor-
able determination can be made. If this occurs, organized crime and dis-
organized crime have identical results from a quantity standpoint but the
overall transfer of wealth from customer to producer is far more pro-
nounced. Consumer surplus (the difference between what a customer is
willing to pay and the price paid) evaporates as the benet is transferred
to the monopoly organized crime rm (Figure 4.1).
92 THE ECONOMICS OF CRIME
Consumer surplus
Price
Demand
curve (also
Demand curve price)
MC
Monopoly
price
Competitive
price
MR = MC
MR Demand curve
Monopoly Competitive
quantity quantity
monopoly and output is lower, it stands to reason the same is true whether
the rm is a legal or an illegal combine. As such, the monopolization of
certain segments of criminal activity will actually reduce criminal activity
over a competitive environment. RICO is, therefore, a foolish endeavor.
In the real world, the previously discussed economies of scale and
scope, as well as the ability of organized crime to price discriminate, will
cause an increase in the amount of crime over the static analysis given ear-
lier. In the case of economies of scale and scope, this is because the cost
structure of criminal organizations operating under economies of scale or
scope lowers both overall and marginal costs. As the marginal cost of crime
falls, more crime is supplied. In the case of price discrimination, consumers
end up paying higher prices than they otherwise would, causing marginal
revenue to rise. Once again, more crime is supplied. It might be that the
output of crime will actually exceed that of the competitive sector once all
factors are accounted for: the enforcement of RICO statutes might be an
economically rational choice right after all!
To ensure continuation of the monopoly either as a single rm or as a
cartel requires large-scale expenditure of resources to preclude entry of
new criminal organizations. This is accomplished through violence or even
cooperation with the police force. However, there is now evidence
organized crime may be breaking down. Older taboos against killing
non-organized crime elements are weakening and the enactment and
enforcement of anti-racketeering legislation has led to a precipitous decline
94 THE ECONOMICS OF CRIME
alcohol. The bar has lower costs when it dilutes the drink and yet expects to
receive the same amount of income. The exact amount of the payoff is
immaterial for this analysis but it must be greater than the payoff of
1 received by the speakeasy from serving alcohol provided the customer
pays. If the customer fails to pay, the speakeasy must lose more by serving
alcohol than it would if it were to water down the drink. The customer who
fails to pay realizes a greater benet than if he pays. Since this game is played
simultaneously, neither strategy is revealed before the other side commits.
We assume the customer attempts to pay for the drink using counterfeit bills
and enters the establishment with this intention (Table 4.1).
Without enforcement, the result is another prisoners dilemma
(Table 4.2).
Though both customer and speakeasy would do better by serving alco-
hol and paying, neither has incentive to do so, leading to the Pareto Infe-
rior result of the speakeasy watering down the drinks and the customer
paying with counterfeit bills. If we have a system of contract enforcement,
both can be led to the Pareto Superior result. Since this cannot be by the
a > 1, c < 0 (serving alcohol costs more than watering down the drinks)
b < 0, d > 1 (failing to pay is better than paying)
courts, extralegal justice is necessary. Every time the speakeasy waters down
the drink or the customer fails to pay, organized crime extracts a penalty
against them, which we designate P. If the penalty is large enough (i.e., it
overwhelms the extra benet obtained by cheating), the result is both sides
will act honestly (Table 4.3).
Therefore, provided that P > -c and P > d - 1, we get the result as shown
in Table 4.3.
It might be easier to see this if numbers were attached to the game
(Table 4.4).
Attaching penalty of 0.75 for noncompliance leads us to the optimal
solution of serving alcohol and having the customer pay (Table 4.5).
One caveat existsthe protection of this extralegal system is, like pro-
tection offered by the government for legal transactions, not offered in a
market setting. Government may hold a monopoly on sanctioned violence
but organized crime has sufcient power to dispel any myth unsanctioned
violence cannot be easily and forcefully applied. Still these monetary costs
will be less than what would be exacted from individuals who refuse to pay.
Organized crime will make them the proverbial offer that cannot be
refused, not because terms are so desirable but rather because failure to
agree results in effects that are most denitely undesirable.
The game we disclosed above is somewhat simplied by assuming the
penalty is the same for both sides: frequently, it may not be. In addition,
for some individuals, the penalty exacted will not ensure compliance. The
penalty is only extracted upon detection and if one believes the probability
of detection is low or the benets from cheating relative to the penalty end
up being greater in the mind of the individual speakeasy or customer, that
particular side will still defect and the penalty will have to be applied.
Trust
In most market transactions, trust is important. Lack of trust limits the size
of criminal enterprises. As organized crime operates as a cartel, cheating
may be rampant.
There seems to be a division of markets based on geography that has
come to permeate organized crime. Until recent federal prosecutions under
the RICO Act made separation of federal from local jurisdictional crime no
longer protable, domestic interests would rarely involve themselves in areas
exposing them to federal prosecution such as narcotics or gun running, pre-
ferring instead the safer avenues of prostitution, gambling, and providing,
according to Sterling,2 a license to foreign interests to take on criminal activ-
ities that would initiate federal prosecution. In such ways, criminal interests
in the United States operate a reverse franchise operation, allowing establish-
ing of enterprises in their territory that go beyond the scope of their normal
operations. The notion of a Maa code that precluded them, in large part,
from getting involved in guns or murdering civilians or law enforcement
ofcers was ction created for Hollywood consumption. The reality is such
activities would increase the likelihood of getting caught and successful
98 THE ECONOMICS OF CRIME
The Godfather ordered Sam to empty his pockets and found three marked
bills.
Where did you get these bills and what did you do with the rest of my
money?
Sam gestured some more and his brother relayed that he had stated, I do
not know what it is that you are talking about. This is simply my weekly pay.
The Godfather was really upset now and pulled a gun and pointed it at
Sams head. Tell me again, where did you hide the money you stole from me?
Sam started to sweat and quickly signaled to his brother, Please brother,
tell him the truth. You gave me those bills.
The accountant replied his brother had said, Okay I stole from you but
you dont have the guts to pull the trigger.
Although blood may be thicker than water, money might trump all else.
Victimless Crimes
Why do we have laws against certain activities? That answer may seem
obvious, but it isnt. To understand why, we rst identify the three main
categories of crime:
Each entails certain costs to society and others but the nature of these
costs differs across types. Crimes against persons, including rape, murder,
assault, and various gradations of each, impose a cost to the individual
harmed but also to society through the loss of future productivity. If some-
one is murdered, they will not be able to work again; this reduces the ow
of goods and services, both market and non-market, that would have
otherwise been produced. This is not a callous observation: even those who
are not in the labor force are productive in some sense through benets
others receive from their presence. A retired great-grandfather produces for
his progeny a stream of enjoyment that would be missing upon his death.
However, societal losses exceed just that, for the value of a life is more than
simply ones productive capacity As a member of society, the enjoyment of
life each of us has is of benet to society regardless of whether it is shared
with others since society can be thought of as the aggregation of individual
preferences.
In addition, there are costs each of us incurs to protect ourselves or to
reduce potential victimization costs. These costs and the services and goods
acquired to insure oneself against such crimes include life insurance,
medical insurance, alarm systems, pepper spray, and rearms. The degree
to which these are purchased is, at least partially, dependent on the level of
violence against persons in society. If such crimes were reduced, demand
for these services would drop and people would make other choices. Crime
102 THE ECONOMICS OF CRIME
prostitute who acquires AIDS, and the gambler who embezzles to pay off
his gambling debt all may reduce the productive capacity of the nation.
However, the same can also be said of a host of other legal activities. What
tends to separate out illegal activities from legal ones is a moral proscription
against them.
MSC
MPC
MPB
MSB
Q* Q1
Drugs
this provided in prison can aid in the recovery of such individuals and
lower death rates by drug-related causes will result. It is unclear whether
there will be much of a reduction in crime by locking up drug offenders.
While some offenders commit violent crimes due to pharmacological
effects of drugs and others will engage in prostitution and theft to enable
them to pay for their habits, the vast majority of drug users engage in this
use without ancillary criminal behavior. A large percentage of the working
age population habitually (at least once a month) consumes illegal drugs
(mostly marijuana) and an even greater percentage abuses prescription
drugs. Even so, chances of being caught for any drug offense are remote.
Stricter sentencing is unlikely to bring about dramatic reductions in crim-
inal activity for this segment of the population. This is because it is the
certitude of punishment as opposed to the severity that causes the greatest
reductions in such behavior. With a small chance of getting caught and
with many of those offenses being misdemeanors, there is little reasons to
reduce consumption. More concern seems to be with the supply side as
opposed to demand side, which is precisely the wrong way to win the drug
war.
There are other costs associated with the drug war as well including
breakdowns of the family unit and moral costs associated with both the
visible aspects of the problem and the knowledge that certain individuals
are engaging in these activities. In addition, there is increased corruption.
The very illegality of drugs has also made it very protable and much of
these prots can be used to assist in bribery of law enforcement and other
public ofcials. Such incidents make the criminal justice system inherently
less efcient and fair and thus have detrimental effects that go well beyond
the corrupt act itself.
To fully understand the drug issue, it is best to build a supply and
demand model. We have two groups of individuals, addicts and occasional
users, who comprise the demand for the drug. On the other side of the
issue we have the dealers. Many studies seem to suggest addicts have a
perfectly inelastic demand for drugs, while occasional users will be price
sensitive. I agree occasional users will be more price sensitive than addicts
but disagree with the assumption of perfectly inelastic demand for
addicts as will be demonstrated shortly. However, for now, we will assume
addicts disregard price. They have a need and they will fulll it regardless of
VICTIMLESS CRIMES 109
the cost. Still, even under these assumptions, in the long run, the impact of
price on addicts will become less than perfectly inelastic as some occasional
users (who are price sensitive) will shift into the realm of addicts due to
overexposure to the drug, thus attening the addicts demand curve. The
various demand curves for both addicts and occasional users in both the
short and long runs are given in Figure 5.2. You will notice that even occa-
sional users have more elastic demand curves in the long-run. This is
because if prices stay high, they will tend to shift to other drugs or activities
that substitute for drug use. The reason for the high inelasticity for addicts
is precisely since there is no substitute for the high they receive from the
drug while occasional users by their very actions show other activities or
drugs are substitutes. They are more sensitive to price changes than are
addicts.
Individual addicts develop tolerance for the drug (Figure 5.3), causing
an outward shift. Overdose deaths cause subsequent reductions, so the
long-term trend is uncertain.
Overall demand for the drug depends on the relative distribution of
addicts and occasional users in a market. The greater the percentage of
addicts, the more inelastic the demand curve. It might also be the case
the addict market is not perfectly inelastic in the short-run, but instead
Price
Price
Quantity Quantity
Figure 5.2. Demand for illicit drugs by addicts and occasional users.
110 THE ECONOMICS OF CRIME
Addicts
Price
Quantity
PM Deadweight loss
Price
Price
PC
D
MR D
QM QC Quantity
Quantity
PA
MC
MC
D
MR=MC
MR D MR
Addicts (on the left) pay more than occasional users (on the right)
Consumer
surplus
Price
Price
D D
Quantity Quantity
pay is the actual amount they pay for the drug. There will be no reduction
in quantity for the monopolist versus the perfectly competitive market but
the monopolizing rm will have a lot more revenue as every individual
consumer will be paying a different price all the way down to the perfectly
competitive price. The amount of income that the drug users in the per-
fectly competitive market will retain will be much lower, while prots for
the monopoly criminal rm will be far higher, providing additional
resources for corruption and maintenance of the criminal monopoly.
Given these facts, we need to understand what happens when we
undertake efforts to reduce drug use. Concentrating on the supply side
only pushes up the price of the drug (from P1 to P2), deterring occasional
use but doing little to control addiction as shown in Figure 5.7. Since most
of the losses associated with drugs are fostered by addicts, drug interdiction
efforts will likely be of little benet in reducing ancillary costs.
Increased prices for addicts leads to more criminal behavior. This is an
issue when organized crime engages in price discrimination. Higher prices
paid by addicts lead to more crime in other areas as addicts seek to pay for
their habits. It allows for expansion of control by organized crime into
other markets, such as prostitution, which is covered in the next section.
Public policy designed to reduce crime might seek reversal of price discrim-
ination policies undertaken by the organized criminal enterprise: force
higher prices on occasional users to deter use and lower prices for addicts.
This can be accomplished by increased enforcement efforts against occa-
sional customers as well as the provision of addict cards that allow addicts
S2 S2
S1
S1
P2
Price
P1
ingesting of the drug, many individuals may feel uncomfortable and may
not wish to participate, thus lowering potential benets. There are also
moral costs associated with dispensation of drugs. Additionally, the lower
demand for the drug would normally reduce price unless enforcement
efforts against occasional users are increased simultaneously. These actions
will make arbitrage all the more protable. Thus the government could be
subsidizing the very industry it is seeking to stamp out.
A nal possibility is complete legalization. Such a program would dra-
matically reduce cost for suppliers and will fuel demand due to reduced
stigma and penalties attached to drug use. The effect on the price of drugs
in indeterminate and depends on whether the decrease in costs or the
increase in demand dominates. Decriminalization is currently public policy
for personal use in several countries. However, decriminalization is not the
same as legalization. It is instead a refusal to prosecute users and shifts the
focus to supply management techniques. However, supply management
doesnt work. Legalization would make both sides exempt from criminal
sanctions. Taxes can be put in place to pay for negative externalities. The
impact of taxes either on the seller or the buyer would have an effect similar
to the outright prohibition we have currently imposed, except that the
current penalty is probabilistic in nature: you may or may not go to jail
or prison for your actions while a tax is uniformly imposed. Of course, even
now, each addict has opportunity costs associated with trying not to get
caught. These opportunity and transaction costs would dissipate in a legal-
ized framework.
Legalization will cause an increase in both supply and demand and
could also lead to concentration within the industry as smaller players con-
solidate and grow. There are likely signicant exploitable scale economies.
There could be increased competition due to reduction of barriers to entry
and elimination of the effects of law enforcement. There will likely be
reductions in corruption and law enforcement costs as well.
Prostitution
Prostitution is a somewhat complicated matter with respect to if it is truly
victimless. To the extent it is a choice, no matter how reprehensible that
choice may be to others in society, the prostitute cannot be construed to be
VICTIMLESS CRIMES 115
a victim. Yet when children are the prostitutes or the prostitute is a drug
user or an illegal alien placed in a type of servitude to pay for drugs or the
service of transporting to a new land, the prostitutes are victims. Similarly,
individuals set into prostitution by human trafckers are victims. Yet those
in legal brothels throughout the world, and women who are self-employed
as prostitutes make prostitution a career choice and are not victims in the
classic sense of the word.
The exchange of sex for money is the dening characteristic of prosti-
tution for most people but, in truth, it is the contractual obligation to
satisfy the sex contract that qualies a particular action as prostitution.
Sex in adult lms is a form of prostitution even if such arrangements are
typically legal under the clause the payment is for acting services as opposed
to sex. Similarly, despite some feminist protests to the contrary, the mar-
riage contract and dating that results in sex are not forms of prostitution
because there is no contractual guarantee of sex in either case, even if there
is a large amount of money being spent and a strong desire on the part of
one of the parties to engage in sexual relations.
Prostitution is illegal in all states except for Nevada where it is legal
everywhere except in Clark County (where Las Vegas is located), Washoe
County (where Reno is located), Douglas County (where Lake Tahoe is),
and Lincoln Counties, as well as the capital city of Carson City, which is
not part of any county. It was completely legalized in the Netherlands in
2000, although prostitution itself had been legal since 1810, from 1911 to
2000, it had to be conducted outside of brothels, which were illegal during
that period. Other countries have interesting ways to control prostitution.
In Sweden, it is legal to be a prostitute but not a customer, which means
the Swedes employ a demand restraint system only (Figure 5.8); the result
is a lower price and reduced prostitution.
Cracking down on prostitutes decrease the quantity of prostitution and
increases its price (Figure 5.9).
Prostitution is somewhat different from illicit drugs in that there may
be an ability to alter the market through manipulation of legal markets for
goods and services. Many people believe in a linkage between pornography
and prostitution. If pornography degrades women and increases sexual
desires, an increase in pornography may increase demand for prostitution,
driving up its price and quantity. Thus taxation of pornography may have
116 THE ECONOMICS OF CRIME
P1
P2
D2 D1
Q2 Q1
S2
S1
P2
P1
D
Q2 Q1
human trafcking since it raises the effective price that trafckers can
receive.
legal right to work in this country compete openly and on equal footing
with those who have no such right. This is in sharp contrast to the formal
market where concerns over proper documentation have limited illegal
alien employment. Documented workers are more certain of their rights
to a legal claim that can be exacted in small claims court for non-payment
and this may lead to greater employment opportunities for illegal workers
who are unsure of their rights in such matters and do not wish to risk
deportation.
This is a case of segmented labor markets where markets are distinct with
different participants but they are also interdependent We dene the for-
mal sector as having two markets: a skilled and an unskilled market for
labor. The skilled market is characterized by production complementary
to the unskilled market. Increase in output of the skilled market pushes
up demand for the unskilled market and vice versa. The informal market
is exclusively unskilled and is a substitute for the formal unskilled market.
The supply of labor will be fairly inelastic in both markets of the formal
economy but highly elastic in the informal market (Figure 5.10). For all prac-
tical purposes, the supply of labor is innite in countries that send migrants,
meaning deviation from perfectly elastic supply of labor is due to immigra-
tion restrictions. The more restrictions placed in terms of legal impediments
and immigration enforcement, the less elastic the supply. If there were no cost
to move, the informal sector would have perfectly elastic supply.
Instead of using the term price, we use the term wage on the graphs.
The wage rate paid is the price of labor. Increases in output from the skilled
S*
Wage
Wage
Quantity Quantity
The formal sector is characterized by a fairly An increase in enforcement action against undocumented
inelastic labor supply function aliens will result in a more inelastic labor supply due to higher
costs to cross borders.
labor market will increase demand for labor in the unskilled labor market.
If the unskilled labor market does not have to compete with the informal
sector, wage rates will rise more rapidly in that sector. Since the output
from the unskilled sector is a function of the number of workers and the
price in the informal sector is lower, increasing output in the informal sec-
tor will increase wages faster in the skilled sector than if output increases in
the unskilled formal sector (Figure 5.11).
When we combine the two markets in Figure 5.12, we can see the
impact of lax law enforcement for immigration violations on wage rates for
both illegal aliens and unskilled natives.
Illegal immigration pulls down wages of unskilled worker who compete
directly with illegal aliens and wages of illegal aliens themselves, while
W2 S
W2
W1 W1
D2
D2
D1 D1
L 1 L2 L1 L2
The more inelastic the supply of labor, the more increases in demand will cause increases in the wage rate
SL
SL + Sl1
Wage rate
W1 SL + Sl2
W2
L2 L1 L1 + l1 L2 + l2
Labor employed
When immigration enforcement becomes more lax, the wage rate falls for both unskilled in
the formal market and in the informal market. However, employment FALLS in the unskilled
formal market but RISES in the informal market, which is composed of illegal aliens.
Torts
As discussed in the previous chapter, there have been evolving standards
over what constitutes a crime. Not all wrongful acts are crimes. Simply
because someone has done you wrong, it isnt necessarily a crime. Some are
purely moral crimes over which one can legally do nothing. An example of
this is the crime of plagiarism, which is one of the venial sins of academia,
unless it rises to the level of copyright violation. Plagiarism is dened in
academia as the taking of someone elses idea and either representing that
idea as ones own or using it without giving proper reference. Even if the
words are not taken but the thoughts expressed are such that they are
122 THE ECONOMICS OF CRIME
unoriginal with the author but were instead deliberately lifted from some-
one else and falsely represented as being original with the author, plagiarism
has occurred. Yet it is something that cannot be prosecuted in most cases.
Of course, it is a matter of degree. The mere taking of an idea from someone
else may constitute plagiarism but unless the idea was patented, such takings
may be legally permitted, even if the act is morally reprehensible. An excep-
tion is made in certain creative industries. Movie treatments, for example,
have been found to have greater legal grounds for a lawsuit than would nor-
mally be found in common law. Thus the submission of a movie idea that
proves substantially similar to a produced movie may engender a successful
tort action if it can be proven that the idea provided the genesis for the nal
script. Still, while the specic expression of that idea may be protected by
copyright, unless there is material gain, it is unlikely that one can prove
criminal liability, although civil liability may emerge.
A tort, which is a wrongly committed act against another that can be
pursued through a civil process, is more encompassing than criminal action.
Torts are not contractual violations, but are instead violations of law, but
they do not rise to the level of infraction (the lowest level of criminal offense).
They are, in the broadest sense, violations of specic rights and obligations
that are legally acquired and these violations can be remedied via a court
process. I cover torts in much more detail in my forthcoming companion
book from Business Expert Press entitled Economics of Common and Civil
Law. but for now on some differences between crimes and torts.
Theft is not a tort. Torts are violations of a set of rights associated with
property; they are not violations of property. They are associated with
interference with legitimate rights of others, not prevention of exercising
rights implicit when one actually takes property through theft. Torts also
involve accidental damage caused by one person without having to dem-
onstrate negligence or intent.
A tort can be brought for intentional or negligent damage caused by
another either to property or to a person, even if the individual who com-
mitted the tort has been acquitted in a criminal trial. This is because crim-
inal law, for the most part, does not provide for civil liability wherein the
individual causing the damage is liable to pay damages to the victim.
Although restitution may be made as part of a criminal complaint, it is the
duty of the criminal justice system to seek redress and recompense to
CRIMES AGAINST PROPERTY 123
society in general, not the victim. A murder not only harms an individual
family but it also harms society (although the harm to the individual and
his immediate family is no doubt far greater on a personal and nancial
level than the effect on other individuals). Criminal processes can only
adjudicate whether someone is guilty beyond a reasonable doubt (rather
than declared innocent) of a crime. Torts adjudicate whether someone is
responsible for an action causing harm, based on preponderance of the
evidence, a lower standard than the beyond a reasonable doubt required
for a criminal complaint. These differences mean that even when a person
is found not guilty of a crime, a civil case can still be brought by the
aggrieved party. An example is the civil judgment against O. J. Simpson
where he was found liable for the deaths of Nicole Brown Simpson and
Ronald Goldman even as he was acquitted of murder in a separate trial.
Theft
Theft is a transfer of wealth from one individual to another that is both
unauthorized by government and unsanctioned by the individual for
whom the wealth is pilfered. From the standpoint of economic efciency,
it is no different than when the government taxes Peter to pay Paul, yet we
accept taxation (for the most part) as legitimate and theft as wrong, even if
we dont agree that the government should be taking money from one per-
son to pay another. When government taxes and redistributes income
without direct consent, it may be a legitimate use of power but when a
private individual does it, it is illegitimate. Part of the reason is, in a democ-
racy, the governments actions are, to at least some extent, controlled by
the electorate. Since governments are elected, we can think of its actions as
have the indirect consent of the governed, even if direct consent is not
given. Governments also adhere to the rule of law. If the government
behaves in a capricious manner with regard to taxation, we can sue and it
will (usually) obey the judgment of such courts. However, thieves are an
entirely different group altogether. They steal at random (from the perspec-
tive of the victim) and their form of redistribution is not taking from those
who have and giving to those who have not but instead is taking to enrich
themselves. Indeed, most of the time the individual being stolen from is
not wealthy by any stretch of the imagination.
124 THE ECONOMICS OF CRIME
strategy to forestall the nuclear threat: they build a doomsday device which
is set to automatically deliver a thermonuclear response of their entire arse-
nal if even one bomb is dropped on them. In so doing, they hope to pre-
vent war: what entity would go to war if the other side had a credible threat
to essentially commit suicide and take the other side with them? Only one
problem: they neglect to tell the Americans they have developed this.
When a mad colonel decides to launch a nuclear air strike on the Russians.
Well, I dont want to spoil the movie ending for you.
Thus it doesnt matter what your security system is if thieves are
unaware of it. Professional thieves can disable many such systems, even if
it does take extra time and once they have committed to a job, the marginal
cost of completing it goes down. They are more likely to complete the job
they have already started. If you warn the thief you have a system even if you
do not, you reduce the incidence of break-ins from the outset.
Jamaica, for example, despite a high murder rate, has a fairly low prop-
erty crime rate because most home owners have armed security guards who
respond quickly to alarms going off. A mistake can trigger a response unit
with automatic weapons and the concrete-walled homes also typically have
burglar bars on their windows and doors, all of which make breaking into
the home more difcult than in the United States, where homes have
numerous glass windows and fewer homes are protected by alarms.
Involuntary transfers of wealth have other consequences as well.
Greater feelings of insecurity and less well-being result from burglaries in
an area. Such transfers weaken the institutions of private property. Since
stolen property remains the property of the original owner, even if one
purchases a good, it can be conscated and given back to the individual
from whom it was stolen. This is, of course, another good reason to beware
of people selling televisions outside of a moving van at the corner of 35th
and Broadway for 20% of the price in the store, no warranty or box
offered, cash on delivery expected.
Supply-Side Changes
There are certain discernible effects on society in general from such crimes,
even if we are not personally victimized by them. Additional resources put
in to protect merchandise from being stolen, security guards and alarm
126 THE ECONOMICS OF CRIME
systems designed to keep burglars at bay, insurance to allow for the recov-
ery of losses if they occur, all end up costing money. Even if a business does
none of these things, it will need to self-insure by generating greater
revenue to replace losses should they occur. This will have the effect of
increasing the cost of doing business, thus raising the supply curve
(Figure 6.1).
This also reduces the quantity sold (from Q1 to Q2) and raises the price
paid (from P1 to P2). These higher costs will not be fully paid by the con-
sumer, although the business will be able to pass some of them on to its
clients. The reduction in business as a result of these higher costs leads to a
reduction in quantity, which implies all costs cannot be fully passed on in
the form of higher prices.
To understand what proportion of costs is passed on and what propor-
tion must be absorbed by the business, we need to understand how the
supply curve shifts. Since the supply curve represents the marginal cost of
selling an additional unit, it shifts upward by the extra cost encountered by
the business. Thus, as seen in Figure 6.2, this increase in cost is greater than
the increase in price the consumer must pay. Part of the cost of theft is paid
by the business because it cannot fully recoup its costs and retain the same
level of sales. This will lead to job loss within the business sector experienc-
ing the theft and can become a vicious cycle as higher prices lead to more
theft. An alternative way of thinking about it is to think the consumer pay
higher prices but the business loses sales.
S2
S1
P2
P1
D
Q2 Q1
S2
S1
Paid by business
Increase P2
in cost Paid by consumers
P1
D
Q2 Q1
The degree to which this will be reected in higher prices or lower sales
is based on the price elasticity of demand, which is dened as the percent-
age change in quantity demanded divided by the percentage change in
price:
(6.1)
S2 S1
Q2 Q1
S2 S2
S1
S1
P2 D2
P1 D1
Industry Firm
Figure 6.4. When theft raises cost across the industry, the consumer pays.
CRIMES AGAINST PROPERTY 129
D
S2
S1
P2
P1
Demand-Side Changes
Increases in burglaries affect demand for insurance and demand for prop-
erty. An increase in burglaries also leads to increased costs for insurance
companies through payouts for losses. This results in an upward shift of
the supply curve. The rise in demand for insurance tends to push up the
price of insurance and increase quantity sold, while the upward shift of the
130 THE ECONOMICS OF CRIME
supply curve will also push up the price of insurance but decrease quantity
sold. The effect on the quantity of insurance sold is indeterminate and
dependent on whether the demand-side effect or the supply-side effect
dominates. There will be an unambiguous rise in the cost of insurance
(Figure 6.6).
The price rise of insurance will cause a drop in demand for insurable
property because these two are complementary products. Thus, for exam-
ple, expensive jewelry will be affected and jewelers will face both reduced
sales and lower prices for their products. In addition, demand for such
goods will likely drop in the aftermath of burglaries, even if insurance could
never have be purchased at all on those goods, because of worries over the
potential loss of the item through theft (Figure 6.7).
S2
P2
P2
P1 P1
D2
D2
D1 D1
Q2 Q1 Q1 Q2
In this case the quantity of insurance sold falls In this case the quantity of insurance rises
while the price of insurance rises while the price of the insurance rises
P1
P2
D2 D1
Q2 Q1
(6.2)
This number will lie somewhere between 0 and . That is because the
supply curve, except in the extreme cases of a vertical or horizontal demand
curve, slopes downward. Firms supply more as price rises, not as price falls.
Perfectly elastic supply occurs in the case of free, non-market goods, such
as air, which, for all practical purposes, is unlimited and without opportunity
cost (though clean air may be quite limited and cost-prohibitive in many
urban environments, especially in the Third World). In such a case, price
will not rise above zero even for vast increases in demand. An example are
songs illegally downloaded from the Internet. Such situations are unlikely to
last forever and, at some point, price will rise to a non-zero amount.
What happens to home prices when crime rises in a neighborhood?
Home prices decline because fewer people want to live there. We see this
using supply and demand graphs by representing the supply of housing as a
stock, which is xed for the short-term, and varying demand (Figure 6.8).
Similarly, when forgeries are commonplace, the price of originals
declines due to reductions in demand for artwork. This reduction in
demand arises due to uncertainty over whether a particular painting is by
a master artist.
P1
P2
D1
D2
S
Fenced Goods
Any increase in the rate of theft almost always represents an increase in the
supply of stolen property to fences, individuals who sell stolen property to
others. The only exception is when the thief procures goods for himself,
such as weapons, drugs, or cash.
Fences provide cash conversion of such property to the perpetrators of
burglaries. Rarely do fences provide anything close to full value of the
goods. They operate in the grey areas of the legal arena, purchasing prop-
erty without asking about ownership, and taking goods from both legit-
imate and illegitimate trafckers in property. Since a lot of property lacks
documentation as to its ownership upon sale, it can be dispensed not just
to those who know the good is stolen but also to legal businesses, such as
pawn shops, at the prevailing rate for legally acquired goods. Goods
that are high in value but low in documentation often attract thieves.
A Picasso will often go to a client who has commissioned its theft. Thefts
of rare coins or unique pieces of jewelry will be similarly difcult to
unload. Other goods, such as microchips, are handled in bulk by indi-
vidual agents who just happen to have a few hundred of the latest
AMD or Intel processors.
At the same time, some goods must be reprocessed before being sold
again. Cars with their vehicle identication numbers are difcult to resell
in whole and are taken either to chop shops to break them into various
parts that can be sold to repair shops or are shipped out of the country to
resume their life abroad. There are far more cars on the roads of the Third
World than were acquired through completely legitimate means. Aftermar-
ket goods that have been reprocessed often meet demand from the legiti-
mate market and are difcult to discern from other goods.
Demand in the stolen goods market shifts due to changes in demand
for the underlying good or, when individuals know the good is stolen,
because of changes in morality or laws concerning possession and receipt
of stolen property. Thus, if you increase penalties for those who ultimately
purchase stolen property, you not only reduce the quantity of stolen prop-
erty but also reduce the number of burglaries (Figure 6.9).
Stolen goods are typically used goods and the purchase of used goods
tends to drop as income rises. However, it is not at all clear whether stolen
goods are inferior goods (i.e., that demand for them drops as income rises)
CRIMES AGAINST PROPERTY 133
S S
P1 P1
P2 P2
D1
D2 D2 D1
Q2 Q1 Q2 Q1
Increasing criminal penalties for receipt or possession of This will, in turn, reduce the number of burglaries
stolen goods reduces demand for such goods, thus reducing committed. In this diagram, the supply function
the quantity supplied. represents individuals from whom goods are stolen
(the ultimate suppliers of stolen goods) and the
demand function represents the burglars (those who
demand stolen goods in the first instance).
in general because the price paid for stolen goods rises as income rises. This
is because the penalty for receipt and possession of stolen property is not
only conscation of the good but, if someone knowingly acquires a stolen
good (or ought to have known that it was stolen), they face a prison term.
The prospect of prison raises the price of engaging in criminal activity and
thus the price of stolen goods. Unless we can effectively separate the
impact of price from income, we cannot determine whether stolen goods
per se are inferior goods nor can we discuss whether their relatively inferior
vis--vis legitimately acquired used goods. If the penalty is low, acquisition
of stolen goods might be a thrill that rises with income, making stolen
goods normal goods.
In order to determine whether a good is normal or an inferior good, we
use what is called the income elasticity of demand, which measures the
percentage change in quantity demanded divided by the percentage change
in income:
(6.3)
(6.4)
P2
P1
D2
D1
Q1 Q2
P2
P1 D2
D1
Q
Online Piracy
Piracy is the action of copying a digital or analog product and offering that
copy for distribution, usually via the Internet. It differs from theft (despite
what the movie and song industries would like you to believe) as it does not
reduce the physical inventory of the manufacturer. It differs from counter-
feiting as it is usually not done with the intent of making you think you are
purchasing an original or authorized copy. Individuals who buy or down-
load pirated content almost always know what they are getting is unautho-
rized by the copyright owner.
Stolen property is more injurious to the manufacturer than pirated
goods because the manufacturer not only potentially lost sales but also lost
the value of the cost of production on each stolen item. In addition, pirat-
ing intellectual property has certain time limitations on it that do not apply
to stolen property since a conviction for piracy requires the violation of
someones legitimate intellectual property rights. It is impossible to pirate
Gullivers Travels, since that exists in the public domain, but it is still pos-
sible to steal a physical book of Gullivers Travels and be sentenced to
prison for such actions.
One of the classic arguments in favor of song swapping and movie
swapping (also known as pirating) on peer-to-peer networks is it either
does not affect demand or even increases it because it allows customers to
sample music online. To the extent such an argument has validity, the
proponents are making the argument that downloaded music and legally
purchased music are complementary products. While this may be the case
when one cannot download legally, it has no validity when legal avenues
exist for downloaded music. If the medium of distribution drives consumer
CRIMES AGAINST PROPERTY 137
demand, then when legal provision of music is afforded online, the free
method loses legitimacy as a potential sampling source.
Record and movie labels attempt to drive up the cost of illegally dis-
tributed songs and movies by posting les that appear to be legitimate but
are not. The rise in the cost to acquire such les by means of such mechan-
isms will lower demand for such illegally distributed music and movies but
also increase demand for legally acquired music and movies to the extent
the goods are substitutes for one another.
The operative words are to the extent the goods are substitutes. Record
and movie studios as well as other entities tend to make the argument that
pirated goods and legally acquired goods are perfect substitutes for one
another. However, this cannot be the case. A perfect substitute is one
where a small rise in the price of the illegally acquired good leads to all of
its demand going to the legally acquired product. Since the price of pirated
goods is lower, the presence of an illegal market cannot, by itself, indicate
there has been an equivalent loss in the market for legitimate goods. Fur-
thermore, as noted earlier, the presence of an illegal market tends to drive
up the price of legal goods, which has a further depressing effect on sales.
Thus, the amount of loss needs to be calculated not based on the actual
price that prevails in the legal market multiplied by the number of copies in
the illegal one but based upon the total revenue that would be acquired less
the cost of production if the illegal market did not exist, compared with the
total revenue that is actually acquired less the cost of production in the
presence of the illegal market.
Since some of the purchases in the illegal market would not have
occurred but for the lower price in that market, such purchases do not
impact the legal market. Similarly, used products can be thought of as cut-
ting into sales of new products but we do not consider such competition as
injurious or detrimental to the interests of the new product precisely because
it is legally sanctioned. Competition is not a tort.
Other strategies include outreach and educational programs such as
informing the public of job losses in the recording and movie production
industries resulting from illegal supply of intellectual property. This can
lead to less innovative production as producers concentrate on certain
hits as well as a reduction in the overall level of production. However,
strengthening intellectual property laws and greater enforcement of the
138 THE ECONOMICS OF CRIME
same does not mean countries lacking such a policy will nd themselves
without a music, book, or movie industryit merely means it is more
difcult to sustain one. Indeed, intellectual property rights are a fairly
new concept and lengthening the time allotted for copyrights might actu-
ally limit production of such property. Imagine a Walt Disney Company
unable to reach into our collective heritage to produce a Snow White or a
Cinderella because the Brothers Grimm still owned the copyright. During
the founding days of the American Republic, copyrights in Britain were
not enforceable in the United States. British book publishers either had to
publish in both countries or were caught off guard as American publishers
quickly copied the texts of books for redistribution in the United States.
This did not lead to the development of copy protection techniques or the
death of the British book industry. Instead it led to increased licensing of
books and an eventual increase in sales for all parties involved.
Counterfeiting
Counterfeiting is the crime of copying something with the intent to
deceive someone else into thinking the copy is an original. A counterfeit
is not the same as an inferior product that competes with an established
brand nor is it the same as name platting, the practice of car companies to
sell virtually identical cars under different brand names (such as Ford and
Mercury) at different prices (with only grill and styling differences).
Anti-counterfeiting measures for products include provision of warran-
ties and other benets that can come only from legally produced goods
(although some counterfeiters actually offer warranty and return policies
that are superior to those offered by the original manufacturer!), installation
of identication marks such as holograms, use of anti-copying technology
(such as installation of deterrence equipment in color photocopiers to
make them incapable of copying currency), and use of serial numbers.
United States paper currency is printed on both sides of a paper-like
cloth unique to the U.S. government and the ink is actually pressed into
the cloth. The use of cloth makes it durable. Anti-counterfeiting foils
include use of tiny color strings inserted in the currency and metal strips
inserted in the currency proper detailing the original value of the bill (to
deter bleaching of the currency in an effort to acquire the paper for use in
CRIMES AGAINST PROPERTY 139
printing a higher valued bill). There is a requirement that more than 50%
of the bill remain intact including two of its four corners before a damaged
bill can be redeemed (although this need not be intact in a form that is
wholebills that have been re-damaged or even used as liner for birds
have been successfully recovered by special government inspectors trained
to repair damaged currency so the owners can have the value replaced).
There are numerous other mechanisms built into currency to ensure
against counterfeiting, many of which are classied and not known to the
general publicyou didnt think I was going to teach you how to coun-
terfeit in this book, did you?
The ridges one nds on coins are used to discourage the peeling off of
edges, which regularly occurred when coins were minted in silver. Indivi-
duals would shave off the edges to collect small amounts of silver, leaving a
slightly smaller coin that nevertheless was taken at face value, allowing them
to prot by the amount that they shaved. If done by an expert, changes were
almost undetectable by most individuals. Hence the need for ridges on
dimes, quarters and coins of higher denomination. Although coins are no
longer minted in silver, these ridges remain as a testament to the past.
Vandalism
Unlike other property crimes, vandalism isnt usually about making
money. It encompasses a range of acts from spraying grafti to committing
sabotage. Individuals who commit vandalism experience high psychic
income from the practice and it is difcult to deter by trying to reduce
this income since it is not realized on the open market but is instead some-
thing internal to the individual. If an individual derives pleasure from spray
painting his name across a buildings edice, the way to deter this is to
make it more costly to engage in such activities. This can be accomplished
by increasing severity or certitude of punishment or by making the equip-
ment necessary to commit vandalism more expensive. Bills designed to
keep spray paint cans out of the hands of minors by limiting their sale to
those over the age of 18 or 21 are attempts to accomplish this. Other tactics
include the provision of grafti-acceptable zones to allow individuals to
express their individuality in a controlled environment. Since the majority
of the perpetrators of such crimes are minors, these constructive solutions
140 THE ECONOMICS OF CRIME
Arson
Arson has two basic motivations. The rst is pyromania. Such individuals
probably do not respond as readily to price signals as pyromania is a mental
illness, a compulsion on the part of the individual. On the other hand, those
who commit arson for the purposes of insurance fraud are doing so for a
different motivation, which is monetary in focus. These two activities
require very different actions to reduce them. Similar to drug addicts, one
can focus on efforts to control pyromania by creating controlled situations
for them to experiment. While controlled burn situations may act to repress
such desires, there is also a problem of tolerance that causes those addicted
to watching things burn experiment with res on a larger scale. Unfortu-
nately, some pyromaniacs become reghters who try to turn themselves
into heroes by setting uncontrolled blazes they are later called on to extin-
guish. It is probably best to attempt to identify such individuals and provide
them with mental health services designed to control and cure their addic-
tion to ames. A detailed model of pyromania follows this section.
On the other hand, the arsonist as insurance fraudster is more prone to
respond to activities designed to affect the price of his action. Some of
the activities undertaken to prevent such incidents work equally well
for all types of insurance fraud. These include requiring deductibles and
co-payments as well as ensuring structures are rebuilt in the aftermath of
calamities. Payments can be made directly to construction rms so poten-
tial nancial windfalls can be diminished. In addition, a periodic inspec-
tion of credit reports and nancial statements of rms may point to
potential problem areas requiring payment of higher premiums consistent
with higher risk of nancially-motivated arson.
CRIMES AGAINST PROPERTY 141
Producing res is hard work. He has to search for a good place to start the
re, check to see if there are any police around as well as ensure there are no
people or animals who might accidentally meet their demise if an errant re
was started (he likes to start res but doesnt want to hurt anyone), ensure the
re can be produced quickly, and then run to the safety of a hidden location
to watch the blaze. At rst, he starts res in trash cans but soon he is moving
on to grass elds or buildings, the better to make larger resafter all, the
thrill isnt so great if he doesnt increase the size of the next re over the last
one set. Thus to gain additional res requires greater effort. We represent
this with the production function and the location where the production
function meets the highest indifference curve is the point at which we deter-
mine the amount of arson Crusoe will exert (A*) and the number of res he
will get to watch (F*). For those of you who are wondering, the line that
I draw outward to F* is a straight line that is parallel to the x-axis. That it
appears to be drawn at an angle is an optical illusion (Figure 6.13).
At the point where the production function and the indifference curve
meet, the marginal rate of substitution (the slope of the line tangent to
the indifference curve at that pointalso known as the derivative of the
indifference curve) is equal to the marginal product (the slope of the line
tangent to the production function at that pointalso known as the deriv-
ative of the production function). Thus, the amount of production that
Robinson Crusoe gets from that extra hour of arson must equal the value
that he places on watching Fahrenheit 451 (which is what he gives up to
CRIMES AGAINST PROPERTY 143
Fires
F*
Production function
A*
Amount of arson supplied
commit arson). If this were not the case, our utility-maximizing pyroma-
niac would either commit more arson (if the marginal product were
greater) or commit less arson (if the marginal rate of substitution were
greater). If he could watch two res by committing an extra two days plan-
ning and executing arson but he thinks he should watch three res from
working that period of time, why would he work more? Similarly, if he
could watch three res from working two days committing arson and he
only needs two res to make him want to work and two days committing
arson, why would he work less?
Now Crusoe was on that desert island for a very long while and he went
a little bit crazy trying to sort all of these possibilities. One manifestation of
this insanity is he decides to pay himself to produce res. To ensure he still
will produce the proper amount of res, he decides to set up a prot-
maximizing rm called Pyromania, Inc., with himself as the sole share-
holder. He then pays himself a wage. He then sets up a currency called the
dollar and prices res at one dollar each. Voila! We have our numeraire
good, that good which all other goods are valued. Now the question is how
much should he pay himself per hour?
The solution is actually the same as when Crusoe was working by him-
self. The rm will try to maximize prots so it will produce at the highest
isoprot line that it can nd that is tangent to the production function.
Since the price of res is xed at $1.00, the only thing that can vary is the
144 THE ECONOMICS OF CRIME
Fires
F*
Isoprofit
line
Production function
A*
Amount of arson supplied
wage (higher wages induce more arson but they cost more so the goal is to
set the marginal value product of labor equal to the wagesince the price
of the re is $1.00 the marginal value product equals the marginal product
in this case). Similarly, Robinson Crusoe, as the sole laborer will seek to get
a wage that can offset his dislike for working. He will seek to set the wage
equal to his marginal rate of substitution. But wait a minutethat means
that the wage is equal to the marginal rate of substitution and the marginal
product, which is exactly what we had before we set up a labor market and
a market for res (Figure 6.14).
The market has functioned efcientlywith rational self-interested
participants, the same choices are made in the face of the market or if
Robinson Crusoe made the decisions by himself without the labor market.
This model can also be generalized to the market with hundreds of parti-
cipants. The point is that even though a single individual does not trade,
he still might behave precisely as if he had traded. As such, the model
works even if no market transaction actually occurs.
traditional banditry but until very recently such activities met with rela-
tively light sentences.
Fraud may be divided into several different categories: the most obvi-
ous being insurance fraud, securities fraud, embezzlement/employee theft,
and identity theft. The rst was dealt with in the section on arson. Secu-
rities fraud is a mechanism by which an employee or other individual with
insider knowledge, usually in a nancially sensitive position, is able to, by
virtue of access to critical information or nancial accounts, defraud share-
holders through insider trading or other securities fraud. A few recent
examples highlight this type of behavior in its various forms.
One way to commit securities fraud is the misstated earnings report,
examples of which were perpetrated by WorldCom and HealthSouth.
In an effort to increase the price of securities, insiders will book phantom
transactions as revenue, engage in transfer pricing (the pricing of internal
transactions within a rm for purposes of reporting prots and losses in
different tax jurisdictions, usually with the desire to increase prots in the
jurisdiction that will tax least, while reducing them in the jurisdiction that
will tax) inconsistent with rules for such practices, or accelerate deprecia-
tion improperly.
Securities fraud can also occur when there are insufcient auditing con-
trols in place, allowing individuals to accumulate vast losses without proper
oversight. This falls in the category of securities fraud because the actions
that occur allow the rm to trade at far above its fair market value. One
example is Barings Bank. Singapore-based trader Nick Leeson shufed
money between accounts in Tokyo, London, and his home base of Singa-
pore in an effort to increase prots through arbitrage trading (the action of
buying and selling simultaneously in two markets to take advantage of
slight differences in pricing) and band trading (placing a bet that a currency
or security will remain within a set band or move out of that band over a
xed period of time). His simultaneous status as general manager of the
Singapore branch, running the back ofce at that branch, and as the
rms leading trader led to enormous gains for the bank but also exposed
it to signicant risk. At one point, his power on the Japanese yen market
was sufcient he could normally move the market in the direction he
wanted. However, his short straddle position on the Japanese yen on the
eve of the Kobe Earthquake, which caused a dramatic drop in the Japanese
146 THE ECONOMICS OF CRIME
how it is about to be the next Microsoft. Initially, he might buy the stock
and then pump up the price by hyping it. He then sells his stock and
might even engage in short selling when he stops his rhetoric. Then when
the stock falls in price, he buys the shares back, making money on both
sides of the deal.
Embezzlement is taking from a company or client money belonging to
that company or client and converting it to private use, while employee
theft usually involves theft of physical inventory. Numerous techniques
have been instituted by employees over the years to affect such transfers
of wealth. Common techniques range from shoplifting to more elaborate
schemes. In cash businesses, especially those without clearly marked prices,
these practices occur more often. An employee might fail to ring up a sale
and pocket the money instead. Another practice is to disable security tags
and thus remove products from the store in that fashion. They might team
up with a shoplifter who will switch tags on merchandise so it appears to be
marked down, then they return it with a correctly marked tag without a
receipt to receive the difference in cash.
However, the most protable types of embezzlement involve the use
(and abuse) of technology. In the book Computer Capers, Thomas White-
side1 reports several types of embezzlement including the infamous salami
technique, so named for the thin slices of meat one can purchase at the
grocery store. In this attack, an employee of a rm steals small sums of
money (often as little as fractions of cents) from a large number of accounts
and then deposits these funds into her own account. The potential haul
may make it protable. If 2 million accounts were attacked with an average
of 1/10th of one cent diverted each month, one could steal $2,000 per
month. In fact, according to Whiteside, such an attack did occur and when
the person was arrested, a determination of fact by the judge was that the
theft was not from the nancial institution but from individual account
holders. While this might appear to be benecial because the number of
counts of embezzlement would now increase exponentially, the reality was
far different. Bizarrely, since no theft amounted to even a single cent, it was
declared by the court that nothing of value was taken, the requirement for a
theft to occur. Such a judgment dees common sense since the total
amount taken was of value. This case is, therefore, of questionable
authenticity.
148 THE ECONOMICS OF CRIME
Murder
We can think of murder as being divided, like drug use and arson, into three
distinctive groups: murders of passion, serial murders, and murders for
prot. Murders of passion are committed with short-term consequences
reigning supreme. They are less likely to be calculated with all variables con-
cerning potential capture and punishment in advance, although these might
be of concern once the murder has actually been committed and the task
turns to covering up the tracks so as not to get caught.
This manifests itself in the form of highly inelastic demand supply
functions (Figure 7.1). Shifts in the supply or demand curve, if not done
in tandem, will tend to alter price but not vary quantity by much. Since the
price is a psychic one in the case of a crime of passion, its value is of less
material concern than the quantity of murders.
It might be easier to simply drop our assumption of rationality in
the commission of crimes of passion and assume irrationality. Supply and
152 THE ECONOMICS OF CRIME
P*
Q*
D=S
Q*
demand would be one and the same, both perfectly inelastic and unrespon-
sive to price signals (Figure 7.2).
No matter the price, the desire to murder is foremost in the mind of
the offender. Whether the penalty is a small ne or the death penalty sim-
ply does not matter: at the time of the killing, all that matters is the death of
the person the individual wishes to see dead. Of course, such a situation
may also occur with perfectly rational individuals as well. Suppose that a
couple nds their son kidnapped. Instead of demanding money in return
for the childs life, the kidnapper tells the grieving parents the father must
murder another person if he wants his child to live. Such a situation will
probably cause some fathers to discount any incentive a democratic gov-
ernment could provide either positively or negatively to inuence the
decision.
So why would we still impose a penalty for crimes of passion if people
will not respond to price signals? There are two basic reasons. First, we
CRIMES AGAINST PERSONS 153
less as human beings and more as pawns in a grand game between them-
selves and civil authorities. The weapon of choice is the bomb and other
non-personal methods that devalue the humanity of the individual lives
they take.
On the other hand, serial killers such as Jack the Ripper, the Boston
Strangler, the Night Stalker, BTK Strangler Dennis Radar, and the Zodiac
Killer have no such ideological tendency. Their attacks had other motives:
sexual or occult-related.
Finally, there are mass murderers who kill at a single place and time a
large number of people or spree killers who kill in multiple locations over a
very short time span. The motivation in each case is usually rage and it is
often personal in nature.
The sociopath, unlike the irrational murderer, often takes deliberative
steps to avoid capture. He thus might be more likely to respond to changes
in the probability of capture than in the nature of the punishment itself.
Yet, except for focusing on the root causes of serial killing, which may
include the extreme levels of violence found in todays media and popular
culture, there is little economists can add to the work of psychologists
studying the patterns of serial killing. Serial killers, spree killers, and mass
murders dont, as a general rule, respond well to incentives.
Financially-motivated killers, including contract killers, obviously do
respond to incentives. Financially-motivated killing enjoys a special place
in the denitions of criminologists. Even if the activity results in the deaths
of a large number of individuals over a lengthy period of time, they are not
labeled as mass murderers, spree killers, or serial killers. William Burke and
William Hare terrorized Scotland in the 1820s and sold the corpses to
Dr. Robert Knox who used them in his anatomy classes but they are not
considered to be serial killers due to their nancial motivation. Terrorists
are not considered to be serial killers because political motivation drives
their criminal actions.
The relevant determinants can be drawn using a graph of supply and
demand. In the case of contract killing the supply function encompasses
those who actually carry out the criminal activity (the contract killers)
while the demand function is dened by those who seek such killers.
In cases where the individual who prots from the crime is also the one
who is committing it, the supply and demand functions are internally
156 THE ECONOMICS OF CRIME
driven. Murders that will typically not go punished, like female infanticide
in pre-Islamic Arabia, carry with it a very low cost and, therefore, a higher
incidence. The prohibition against infanticide under Islamic law was cred-
ited with a dramatic drop in such killings.
The demand for murder will shift based on several factors related to the
demand of any good. First, if attitudes towards killing change, we can expect
a shift in the demand curve. The beating of slaves to death was not consid-
ered murder in many jurisdictions. This resulted in cheapening the lives of
slaves and caused additional beatings and deaths. Widespread violence in
popular culture may have a desensitizing effect on todays populace, making
murder a more acceptable alternative for dispute resolution. As noted in
Chapter 2, wealth effects are ambiguous and depend on the expected prob-
ability of eventual punishment. The impact of a prison term (or execution) is
likely to result in a greater monetary loss for the wealthy than for the poor.
This does not indicate murder is an inferior good whose demand drops as
income rises. Instead it means the price paid for a murder rises with income,
causing demand for it to drop. The income effect, which is given when the
price is held constant, is still ambiguous.
If the goals of murderers can be achieved through alternative means,
relative costs of these means are important. A substitute good, in some cases,
for murder is blackmail. If the penalty for blackmail increases relative to the
penalty for murder, this causes a decrease in demand for blackmail and an
increase in demand for murder. Similarly, dropping the death penalty, by
making murder relatively cheaper compared to other crimes will decrease
demand for those other substitute crimes and increase it for murder. Thus,
the imposition of three strikes laws will make murder of witnesses more likely
since the penalty for three strikes of life imprisonment means the marginal
penalty of murder is not as great. Similarly, if we pass a law that dictates the
death penalty for rapists and kidnappers, we should not be surprised if the
victims of these crimes end up as victims of murder as well. The dead simply
do not talk as well as the living. Getting tough on crime other than murder
might end up causing additional murders.
The transaction costs associated with murder tend to be minimized
when the individual desiring the murder carries it out himself or herself.
However, if we wish to reduce murders, increasing transaction costs for
contract killing is a good start. Thus it may be better policy to negotiate
CRIMES AGAINST PERSONS 157
plea agreements with contract killers than with those who demand the
services of these killers. This will have the effect of increasing the transac-
tion costs of hiring such individuals and, therefore, should lower demand
for their services. Recent innovations, such as the Internet, have likely
reduced transaction costs, especially of the information-gathering variety,
for those who wish to have such crimes undertaken. Al-Qaeda terror cells
use the Internet to communicate with each other and it is likely it has also
been used to set up murder for hire transactions.
Any communication technology can reduce transaction costs for illicit
activity. In a well-known case, Eimann v. Soldier of Fortune Magazine, the
mercenary publication was sued over what was alleged to be a thinly veiled
classied ad offering contract-killing services. When the individual who
advertised in that magazine later was involved in a killing for hire made as
a result of that ad, the magazine was sued by the family of the deceased and
a Colorado jury rendered a $9.4 million judgment against it. The judg-
ment was later reversed on appeal. However, a more explicit advertisement
offering contract killing services in the same magazine a few years later did
result in a judgment against the magazine for $4.3 million. This decision
was later afrmed by the U.S. Supreme Court. This reasoning was similar
in that case as in MGM v. Grokster Ltd, when the peer-to-peer software
provider was found to be liable because it not only knew its software was
being used for illegally trading copyrighted material, its actions showed it
actively courted the market by catering to an audience that wished to
engage in such activity.
The supply function for murder is going to have an upward slope, for
as the gain from murder rises, more of it will be supplied. Revisions to
divorce laws that have granted a more equitable distribution of marital
assets have probably also increased the prevalence of spousal murder since
gains from such actions (not having to split the marital assets) have
increased. The imposition of capital punishment may have an effect on
deterring rst-time murderers but, since the actual likelihood of execution
is minimal, the deterrence effect cannot be easily determined. The condon-
ing of state-sanctioned murder via an execution process can lead to a
brutalization effect wherein life is seen as being cheapened. Even more
problematic is the near canonization of some of the more vicious killers
such as Jesse James and John Dillinger in the American mythos and the
158 THE ECONOMICS OF CRIME
media circus that has surrounded some executed individuals such as John
Wayne Gacy may have created an increased taste for murder by those who
crave the spotlight. Gangster movies and TV shows perpetuate this prob-
lem by romanticizing criminal activity.
Assault
Assault has similar characteristics to murder except the victim does not end
up dead at the end of an assault. When used to intimidate, assault can
result in nancial gain. Roughing up individuals may be contracted for the
same reasons as contract killing and the analysis given for murder can gen-
erally be applied to assault cases with the exception of the discussion of the
applicability of the death penalty as a deterrent. Undoubtedly, irrationality
also plays a role in assaults as individuals get angry and sticuffs begin.
At times, assaults result in death and charges are upgraded to homicide.
Deaths occur more frequently with certain weapons, such as knives and
guns, than with bare hands. One way to deter the use of weapons that lead
to a greater incidence of death is to increase penalties for their use. Use a
gun, go to prison, a tag line for one such policy, was intended to reduce
the level of violence, even if it did not reduce the number of incidents.
(the one who wants the task undertaken). Want to ensure the contract
killer doesnt turn states evidence? Arrange for another contract killer to
visit her husband and kids if she decides to cooperate with the police.
Ultimately, one of the difculties of being in a democracy is that dem-
ocratic governments dont engage in tactics that would potentially safeguard
them against all risks. That is also one of the strengths of democratic gover-
nance. Threatening to blow a suspects brains out if he doesnt talk, arrang-
ing for penalties to be exacted on his family instead, sexually abusing him,
physically torturing him to get him to talk, these are the types of actions that
will likely get suspects to confess. Unfortunately, they are also the types of
actions likely to get innocent people to confess. The problem of incentives
having unintended consequences rears its ugly head, notwithstanding the
fact such actions violate the very principles upon which democratic govern-
ments are founded.
Rape
Rape is different from other crimes we have modeled. It is typically per-
formed by a single individual and the benets are almost always exclusively
psychic as opposed to monetary. The harm caused to the victim is oftentimes
more psychic than physical but the effects of the harm may last far longer
than an assaults injuries would. Rape is a crime of power, not passion. It is
about control. Rape victims are disproportionately female, perpetrators are
disproportionately male, and it is the least reported of all crimes, according
to victimization surveys. It is usually a planned crime as opposed to one of
opportunity. To the extent it is a crime motivated by rational action, it can
be described by our supply and demand curves, similar how we dened our
murder for prot market.
In this case, it matters little to us whether the price is high or low as the
benets derived from the practice are purely psychic. Thus activities
designed to reduce both the supply and the demand for rape are desirable
from a public policy standpoint. Reducing the supply implies increasing
the costs of rape to the rapist. This can include more severe penalties for the
commission of rape and greater police resources devoted to trying to appre-
hend suspects. Another action is the issuance of pepper spray or mace to
civilians and promotion of self-defense classes for women. One objection
CRIMES AGAINST PERSONS 161
Hate Crimes
Why do we punish hate crimes more than other crimes? The rationale must
come, if based on an economics perspective, from a perception there is a
greater harm done. This could be based on two different possibilities. First,
hate crime might cause greater harm to the individual who is attacked.
Second, even if the hate crime causes no greater harm to the individual, it
might cause greater harm to society. Hatred itself is a cause of disutility in
society. If we can reduce the level of hatred, everyone will be better off.
Hatred-based activities also cause extra avoidance costs in individuals
who might become victims. If one group systematically attacks another
group for being in a certain area of town, the rational victim may decide
to avoid that area. Avoidance of situations that might place one in danger is
systemic in society yet it a hatred-based situation is usually broader in
nature than one that is more random. Blacks in the racially segregated
South learned not to frequent certain locations and these locations were
greater in number than where whites chose not to present themselves.
While a downtown might be the hub of violent activity, avoided by all,
there would be additional places where blacks would feel unwelcome. This
caused a reduction in potentially protable interactions for all blacks.
Thus, hate-based crime reduces welfare more than non-hate-based crime.
We now have a rationale for penalty enhancement. Similarly, there will
likely be more modications of behavior to avoid hate-based crime. While
everyone might undertake behavior modications designed to reduce vic-
timization (carrying mace for self-defense comes to mind), victimized
groups will perform more actions to reduce the probability of being vic-
timized. Homosexual individuals will choose to forgo showing affection in
public or the display of stereotypical behavior that might draw attention.
The criminal might have as his goal the terrorization of a particular
group and a desire to place that group into the second tier of society.
Targeting one individual for victimization actually targets all members of
the group. The Ku Klux Klan regularly attacked blacks and Jews. Members
of those groups engaged in preference falsication and took on the status of a
subordinate group in society, subjugating their will for that of the majority.
These factors make hate-based crime more costly for society and, therefore,
enhancing penalties for such behavior benets society in general.
CRIMES AGAINST PERSONS 163
Public Policy
With limited exceptions, such as Chapter 1s exposition on Indifference
Curves and Crime, most policy advice in this book has dealt with specic
offences. For example, Chapter 6 discussed strategies to reduce White
Collar crime and Chapter 5 looked at efforts to combat prostitution and
illicit drugs. This is for good reason. In order to catch a criminal, you must
learn to think like them (although not act like them!) and that means exam-
ining policies to deter specic criminal activity.
Modern police techniques owe much to one former master criminal,
Franois-Eugne Vidocq. After being rehabilitated, he established the rst
detective force, the Sret of Paris, consisting at the time of other former
criminals. and his rst-hand knowledge of the underworld and how criminals
thought aided him in foiling crimes. He went undercover to gain information
from informants, introduced the concept of cordoning off a crime scene to
ensure it was undisturbed while looking for physical evidence, invented the
science of ballistics, and began employing sketch artists to render composite
drawings from the recollections of witnesses, an essential task with the grow-
ing urbanization of France to combat the anonymity of the big city. He also
created a card catalog system on which every known criminal in Paris was
listed along with a physical description, a list of crimes, and details of modus
operandi.
welfare. Other priorities will take center stage, such as civil liberties, as
opposed to expansion of security concerns. Although 9/11 may have shifted
our priorities towards the security side, it did not eliminate our belief in
privacy and due process.
Similarly, individuals engaged in private protection against crime do
not expend unlimited, or even all of their nite, resources in stopping it.
We desire to spend our limited nances on other things rather than devote
them all to the prevention of crime.
We can examine the market for crime prevention and prosecutorial
services, which we will refer to as criminal justice. Although this good is
not as easy to quantify as the number of police ofcers or the amount of
crack cocaine, it can be thought of as an index of a number of factors
including, but not limited to, the number of police, the length of sentenc-
ing, and the amount of technology in forensic science.
This composite good is a normal good. As income goes up, demand for
such services increases. Public perception alters demand for criminal jus-
tice. If crime is of greater concern, demand will shift outward. If it is of
lesser concern, demand will shift inward.
Better technology can reduce the cost of processing a crime scene, caus-
ing a downward shift in the supply function, and increasing demand for its
use (Figure 8.1).
To determine the overall level of funding necessary, we multiply the
price of criminal justice by its quantity. Thus, the light grey plus the dark
grey boxes represent the overall level of expenditure prior to the increase in
technology, while the light grey plus the black box represents the overall level
of expenditure after the increase in technology. An increase in supply will
cause an ambiguous change in overall expenditure. As price declines, each
lowering of price
Increase in expenditure due to
increase in quantity
D
Quantity
D*
D
Quantity
unit of protection costs less but, since quantity demanded rises, expenditure
may increase or decrease depending on which effect dominates.
When demand increases and supply stays constant, expenditure on
criminal justice services unilaterally increases by the amount shown in
black (Figure 8.2). Prior to the increase in demand, only the amount in
grey in expended. After the increase, both the amount in grey and the
amount in black are expended.
Increases in criminal justice spending will not necessarily decrease in
the crime rate, but if it does not, it is unlikely additional resources will be
forthcoming.
We can examine individual parts of the composite good by trying to
equalize the benets we have from the last dollar spent on each type of
activity. The last dollar spent on the police needs to provide the same
reduction in criminal activity as the last dollar spent on the courts and the
last dollar spent on prisons. Indeed, we want to ensure each offsets exactly
one dollars worth of crime.
What would happen if this were not the case? Then we are not at an
optimal level of expenditure. Since the marginal benet from engaging in
any activity falls as more is bought, further expenditure in one area without
a corresponding increase in expenditure elsewhere must correspond to a fall
in the benet achieved on that next dollar. Thus, if, at the margin, an extra
$1 spent on the police results in only a $0.90 reduction in crime, further
increases in the police budget can only result in a fall in the marginal reduc-
tion in crime. Each additional dollar spent actually makes society worse off
and we should actually cut spending on police. It drains $1 in resources but
returns a benet of less than that amount. At the same time, if, at the
168 THE ECONOMICS OF CRIME
innocent person could do nothing to avoid his fate as he was not the one
who committed the crime in the rst place.
Yet another concern is what to do about efcient crimes that raise
social welfare as opposed to lowering it. Think about the cost of speeding
for a moment. There is a slightly increased possibility of a crash or death as
a result. However, getting to a destination faster has its own set of benets.
The doctor rushing to the hospital to perform life-saving surgery may well
be taking a risk that we want to see occur. One possibility is to impose ex
post penalties based on the circumstances of the crime. The standard,
Guilty with explanation that accompanies many in trafc court allows
the court to decide an alternative sentence but this has its own set of issues.
That is because whether the person has a good explanation, they still
imposed a cost on society by raising the probability of a wreck. To ensure
they account for this cost, we estimate the expected value of the damage the
individual would cause and multiply it by the chance they will be caught to
derive an optimal penalty. Thus, if the expected value of the cost to society
is $50 and there is a 1 in 25 chance of catching the speeder, we should
impose a ne of $1,250 to be paid either in ne or an equivalent sentence
to prison based upon the money value of their time (if the person is
judgment-proof in that they lack the money).
For crime in general, one consideration we must make is whether to
engage in nes or prison or even execution. We might prefer nes to jail since
a ne redistributes wealth (from prisoner to the court system) but jail lowers
welfare because the individual who is incarcerated cannot be producing much
for society (and a person who is executed, produces nothing for society). But
then you will have the problem of those individuals who are judgment-proof:
if you dont have the money and the only penalty is a ne, all of a sudden the
cost of murdering someone becomes zero and we get a lot of murders.
There are other issues as well. Not only is punishment costly but so is
the entire process of handling criminal cases and that cost can make it
possible that we might not want to deter all crimes anyway. For example,
suppose that you steal a candy bar. The cost of prosecuting you is going to
be far greater than the cost of the candy bar. So why might we do it? Well,
if we dont prosecute lesser offenses, we might end up with more egregious
ones, according to Kelling and Wilsons Broken Windows1 theory.
Another issue is if we dont stop the theft of candy bars, pretty soon a lot
170 THE ECONOMICS OF CRIME
of people will be stealing them. After all, the government has pretty much
said that it was okay to do it. Of course, then the store owners might all go
and buy guns and alter the calculus again: after all, do you really want to
steal a candy bar if it means that you might get shot? Thus one reason we
police small crimes is to stop not only petty crime but also vigilantism.
Of course, we must consider the fact we do not catch everyone. Thus we
might not punish everyone who steals a candy bar. Let us suppose that the
price of a candy bar is $1. Furthermore, let us suppose that the average
thief values candy bars at $0.35. That would mean that society loses
$0.65 in the transfer from one person to another via theft.
Suppose it costs $100 to apprehend and convict an individual. Now
while that is the marginal cost of capturing and apprehending someone, it
isnt the marginal cost of deterring the crime. What we really want to know
is how much it costs to stop a crime from occurring. For that we need to
know the demand curve for stealing a candy bar. Suppose it is rather at
and, therefore, relatively elastic, looking something as shown in Figure 8.3.
The price paid is the expected cost of punishment. The quantity is the
number of candy bars stolen. The trick is to get the marginal benet from
deterrence for society equal to the marginal cost of deterrence for society.
So what is the cost and benet of deterrence? Well, we have to calculate
that. Let us suppose we capture 1 out of every 1000 individuals who steals
a candy bar. According to our theory, we should initially set the ne at
$250. Suppose there are 800 criminals at that rate. If we decide to employ
more police, we raise the expected cost of punishment to $0.26 from
$0.25 (by capturing 1 out of every 96 individuals and keeping the ne at
$250) and end up reducing the number of thieves by 50 (Figure 8.4).
Price
Quantity
$0.26
Price
$0.25
750 800
Quantity
In answering the rst question, we can start by thinking about our eco-
nomic model of crime. Remember people steal because the expected value of
their theft exceeds the expected value of getting caught and punished (after
accounting for their individual valuation of risk). The average thief valued
the candy bar at $0.35, so we can deter her and all those who value the candy
bar at less than $0.35 by setting our punishment at $0.35. If we set it at
$1.00, we deter all theft but at a considerable cost, since monitoring activities
would have to be excessive or we would need disproportionate punishment.
In examining the second question, every time we catch and prosecute
someone, we move resources from another activity. While the prisoner
might pay for the judges, police, and so forth, those individuals are still
engaging in a non-productive activity: they are stopping people from
destroying wealth as opposed to creating wealth. Thus, if society values cre-
ating wealth, it might not want to devote so much to simply preserving it.
In addressing the third question, we are tempted to argue just because a
transfer results in a net benet doesnt mean we should condone unlawful
transfers of wealth. We might argue we should price the ne at $1 or even
higher, to prevent theft by those made better off from trade. However, this
isnt the case. Efcient crime is still punished but it is punished at a rate so
that the transfer benets are negatedyou pay for your crime, just as you
would in a trade, only you do it with a probability (punishment) as
opposed to a certainty (trade). So the most you ever have to set the pun-
ishment at is the value of the good in order to deter crime for all risk-averse
or risk-neutral criminals. After all, if you have a choice between paying
$1 for a candy bar or paying an expected value of $1, you should be indif-
ferent between these two choices if you are risk-neutral. Indeed, because of
moral costs such as a belief that stealing is wrong, the expected cost of
punishment usually must be quite low to most people to steal.
But wait a moment. Why are we counting the damage done to society as
the difference between the cost to the victim and the gain to the criminal?
Shouldnt we negate the criminals gain entirely? Isnt it just morally wrong
to steal? That may be but the optimal punishment theory isnt concerned
with morality or ethics or justice or anything else underlying our system of
jurisprudence. All that matters is efciency. If benets outweigh costs, we
should do it, and we should consider the costs to the criminal just like every-
one else because the criminal is part of society.
PUBLIC POLICY 173
You might want to extract the criminal from society and impose a
higher cost. Yet a criminal is only a criminal when he actually commits
a crime. The person is a criminal when they steal, but if we deter them
from crime, they are not a criminalthey are part of society. There is
another issue. Suppose June steals a $500 TV from an appliance store. June
offers the TV for sale at $350 and Tim steals it from June. Tim values the
TV at $300. We would want to punish both Tim and June for stealing.
If we discount Junes benets from stealing the TV, however, what has
Tim stolen? If you argue we should count the benet for June in one exam-
ple, you have to argue the same in the other example just to be consistent.
Otherwise, theft from individuals who are criminals should go unpunished
(of course, you may think it should go unpunished).
Finally, to come up with a demand curve, we look at how individuals
react to different punishment levels and probabilities of capture. We pro-
duce a demand equation for crime the same way we produce a one for
apples or cars. You never see a demand equation in the real world for those
either, as all you see are points where trades occur. By mapping different
pricing points and quantities demand and with stable preferences, you can
construct a demand schedule for any behavior, including illicit behavior.
Gun Control
Whenever mass murder hits the news, we have calls for more gun control.
As noted in Chapter 7, gun control will almost certainly reduce
ashpoint killings in the spur of the moment when people reach for the
nearest weapon. However, there is the counterargument that concealed
weapon permits reduce crime because the expected cost for criminals
increases when they might shot by their intended victim.
174 THE ECONOMICS OF CRIME
It is also certainly clear that safe storage laws reduce the likelihood
an innocent child will come across a gun and while playing with it will
accidentally discharge a bullet into another child or adult. Gun control
advocates also like to argue safe storage will reduce the chances of a perpe-
trator using a gun on the homeowner. However, safe storage makes it more
difcult for homeowners to defend themselves. If it takes time to retrieve
the safely stored handgun, what is the point of having it around for
defense? According to Lott,2 the passage of safe storage laws resulted in
9% more rapes and 5.6% more burglaries. It seems that criminals are not
as scared when access to guns is reduced.
The jury is still out on whether gun control will reduce crime. However,
what will not reduce crime is gun registration. Registering guns is a fairly
useless exercise since solving a case where a gun is used because the perpe-
trator conveniently left the gun that was registered to them at the scene for
police to nd is of ridiculously low probability. Either the criminal will
dispose of the gun in some manner, will use an unregistered gun (or one
registered to someone else) or will be found at the scene of the crime with
gun in hand. Spending money on gun registration diverts police resources
away from other criminal enforcement and thus causes crime, rather than
reduces it.
With over 200 million guns in circulation in the United States, it is
unlikely gun control can ever be truly effective. Criminals will always nd a
way to acquire guns, so maybe allowing the rest of us to have them is not
such a bad ideaor at least if we are going to restrict something we might
want to restrict the item consumed when discharging a weapon, the bullet
itself. As comedian Chris Rock 3 jokes:
You dont need no gun control. You know what you need? We
need some bullet control . I think all bullets should cost
$5,000if a bullet costs $5000 thered be no more innocent
bystanders . Every time someone gets shot, people will be like
Dang, he mustve done something. Say they put $50,000 worth
of bullets in [him]. People would think before they killed some-
body if a bullet cost $5,000. Man, I would blow your %$#@
head off, if I could afford it.
PUBLIC POLICY 175
elderly inmates are three times that of younger prisoners, due predomi-
nantly to medical expenses.6 Releasing old prisoners will transfer some
costs to public assistance programs, such as Medicaid and Supplemental
Social Security but overall state and federal expenditures will decline. The
main reason for not releasing them is a overreaching belief you do the
crime, you serve your time as witnessed by passage of
truth-in-sentencing laws and three strikes penalties. Yet, individuals dis-
count the future quite heavily so the average 30 year old probably is not
thinking about spending his golden years behind bars when he commits
armed robbery.
Perhaps the worst problem of stricter sentencing guidelines is it denies
to judges and prosecutors the exibility to offer plea bargains that can save
taxpayers money. It can also mean once a person commits a felony, there is
less incentive not to commit another. It leads to a graying of the prison
population and reduces incentives for prisoners to be on their best behavior
while in prison. Normally, prisoners earn credits towards early release if
they obey prison rules. They are granted privileges that are for most of us
taken for granted as part of our ordinary lives but the ability to watch tele-
vision or access a library are not rights when you are incarcerated. By man-
dating penal and judicial systems get tough on crime and make inmates
do hard time, we place both the public and correctional ofcers in
increased danger.
Lady Justice, whose statue appears before many courthouses, is often seen
in a blindfold, rendering her verdict in an impartial and objective manner.
However, many commentators argue disparities such as the sentencing
guidelines for crack versus powder cocaine possession that were
100:1 before the Fair Sentencing Act of 2010 are evidence of racial bias
since blacks tend to be found with crack while whites possessed powder.
Wolfgang7 reports on a study of rape convictions from 19451965 in
southern states that found when black men raped white women, they were
18 times more likely to receive a death sentence than any other grouping of
rapists and rape victims. Abrams, Bertrand, and Mullainathan8 nd in
Cook County, Illinois, judges sentence African-Americans to prison more
PUBLIC POLICY 177
often than whites sentenced for the same crimes. Bowers, Steiner, and San-
dys9 show the race of individual jurors, as well as the race of defendant and
victim, infects the capital-sentencing process.
It is not only defendants who seem to be victims of discrimination. If
jurors systematically view the criminal justice system through the lens of
race, criminal defendants might reasonably ask a jury of their peers be com-
posed of individuals of the same race but this will conict with a
jurors right to be seated when that juror is of a different race. Under-
wood10 notes the right of the juror to be seated for a trial is one of equal
protection under the law. When lawyers are allowed to select a jury that
excludes a particular race, they are implicitly arguing the juror cannot be
trusted to be impartial simply because of race. This bias against the ability
of African-Americans to judge fairly is also present in federal attorney appli-
cations for wiretap approval, which, as noted by Miles,11 are far less likely
to be presented to African-American judges.
This points to a potential pitfall that threatens to drive an even greater
wedge between races in this highly charged political environment. On
April 29, 1992, a jury, consisting of 10 whites, 1 Hispanic, and 1 Asian
acquitted four Los Angeles police ofcers of charges of using excessive
force in attempting to arrest black motorist Rodney King. South Central
Los Angeles broke out in riots resulting in the deaths of more than
50 individuals and $1 billion in property losses.12 The following year,
two of the four police ofcers were convicted of violating Kings civil
rights in a separate federal trial where the jury was more racially diverse
with two African-American jurors on it.
While justice may eventually have been served, trying these ofcers on
ancillary charges begs into question as to whether the government was
acceding to the demands of an unruly crowd that demanded blood. Defen-
dants are never the most popular individuals in society but when we refuse
to honor a verdict, no matter how much we disagree, we risk devolving
into vigilantism and driving a stake through the rule of law.
Conclusion
In this book, we have looked at how economics is used to analyze crime, a
subject that would not, at rst, seem to be under the purview of a eld that
predominantly studies legal market interaction. However, tools such as
game theory, general equilibrium theory, and marginal analysis lead us to
conclusions that are quite profound and challenge traditional ideas about
retributive justice.
While no eld can claim a monopoly on the truth, it is equally true the
use of analysis from various elds can signicantly improve public policy.
When sentences are more determinant as prescribed by truth in
sentencing laws, there is less opportunity to reduce costs in the criminal
justice system and we end up incarcerating those who pose little danger to
society. When we try to legislate morality by passing laws against drugs and
prostitution a signicant portion of our society rebels. When we fail to
acknowledge and correct racial disparities in sentencing and jury selection,
we create a two-class system in which an aggrieved group may fail to honor
the verdicts that are rendered regardless of the legal basis that was given for
them. When we insist on proling people based on race, we ignore that
criminals are rational and will take steps to negate our proling. Think
about that the next time you wonder why we dont simply haul all Mus-
lims off for secondary screening at airports and let everyone else through. If
we did that, we would nd it wont take long before the terrorists are pre-
tending to be rabbis.
Economics may not have a monopoly on the truth but it is also true it
can assist us in many ways to understand and effectively reduce social devi-
ancy. That is something we can and should all appreciate.
Notes
Introduction
1. Anderson (1999).
Chapter 1
1. Hull (2000); Corcoran, Pettinicchio & Robbins (2012).
2. Holahan (1998). The exposition follows the example found in this article.
3. Finkelhor & Ormrod (2000).
Chapter 2
1. Nelson (1970; 1974).
2. Stigler & Becker (1977).
3. Becker & Murphy (1988).
4. Becker (1996).
5. This section is derived from the analysis found in Becker (1968).
Chapter 4
1. Coase (1937).
2. Stirling (1990).
Chapter 5
1. Block (2008).
2. Freeman (1996).
3. Vencill & Sadjadi (2001).
Chapter 6
1. Whiteside (1978).
2. For more information on this, see Block (2008).
182 Notes
Chapter 7
1. March (2004).
Chapter 8
1. Kelling and Wilson (1982).
2. Lott (2000).
3. Rock (1999).
4. Pew Center on the States (2011).
5. Human Rights Watch (2012).
6. American Civil Liberties Union (2012).
7. Wolfgang (1974).
8. Abrams, Bertrand, and Mullainathan (2012).
9. Bowers, Steiner, and Sandys (2001, p. 266).
10. Underwood (1992).
11. Miles (2012).
12. Dreier (2003).
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184 REFERENCES
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Zagros Madjd-Sadjadi
DIGITAL LIBRARIES
This book will guide you to a better understanding
EBOOKS FOR of effective public policy designed to reduce crimi-
BUSINESS STUDENTS nality. By understanding how incentive mecha-
Curriculum-oriented, born- nisms affect criminal behavior, business managers
The
digital books for advanced such as yourself can use this information either to
business students, written reduce criminal activity in your own enterprise or
by academic thought to understand how unethical business decisions af-
leaders who translate real-
Economics of
fect the wider society.
world business experience
into course readings and To accomplish this with a minimum of disrup-
reference materials for tion for you, at the end of many chapters there is
Crime
students expecting to tackle a section called For the Economist where addi-
management and leadership tional material of a more advanced mathematical
challenges during their and theoretical nature, which tends to be more
professional careers. tangential to the non-economists, is provided. In
so doing, business managers and economics stu-
POLICIES BUILT
Zagros Madjd-Sadjadi
way to deliver practical nomics, political science, international relations,
treatments of important and criminal justice. Madjd-Sadjadi has a B.S. de-
business issues to every gree in Computer Science and a B.A. (equivalent) in
student and faculty member. Economics from Sonoma State University, as well
as a PhD in Political Economy and Public Policy
from the University of Southern California.
For further information, a free
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www.businessexpertpress.com/librarians The Economics Collection
Philip J. Romero and Jeffrey A. Edwards, Editors
ISBN: 978-1-60649-582-7
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