Arizona State University Economics of Crime Discussion Questions


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Economics of Crime
Homework #4: Chapters 6 & 7
Chapter 6: Crimes Against Persons
1) How do economists distinguish between a rational murder and an irrational
murder? Why is this distinction important in the analysis of the crime of murder?
2) If a beating (an assault) is a good substitute for murder, what would be the
impact of decreasing the punishment for an assault on the market for murder?
Would this be a good public policy recommendation?
3) Educating women about the risks of becoming rape victims is good public policy
because it decreases the supply in the market for rape. True or false and why?
Chapter 7: Crimes Without Victims
4) What are some public policies that can be used to decrease the demand for
victimless crimes such as gambling and prostitution?
5) What are some examples of behavior that at one time were victimless crimes that
are no longer criminal? What are some examples of behavior that were not
victimless crimes that now are crimes?
6) If the legalization of prostitution required government regulation would this
decrease or increase the expected benefits of legalization? Explain.
Chapter 7: Crimes Without Victims
The so-called victimless crimes is a category of criminal activities that include a wide
variety of offenses such as gambling, prostitution, and narcotics abuse. Recall that
these are crimes where it is hard to identify a particular victim, however, this does not
mean that these crimes are costless to society. The extent of harm done to participating
individuals and to society varies by type of crime.
Economic Costs
Negative externalities – victimless crimes often impose negative externalities on society
by lowering the moral climate of society. These include psychic costs to members of
society that are distressed knowing that these types of crimes occur. An example, would
be areas of prostitution that may have objectionable materials viewable on the street or
seeing a drunk or addict passed out in public, which it may encourage immoral
behavior. These costs are difficult to measure, recall that some people are only affect if
these activities are viewable but for others just knowing they occur harms them. This is
an important point because if negative externalities were only caused from visibility then
we could come up with public policies to reduce or prevent this.
Net Losses – these include losses to society from the economic resources that are used
up as an indirect result of the criminal activity (including land, labor, and capital). This
includes lost productivity from addicts who cannot work or die prematurely, or medical
costs associated with prostitution or drug use.
Opportunity costs – Some may argue that the resources used up in the direct
production of illegal goods/services is a net loss to society since they are producing
economic “bads” rather than economic “goods”. However, resources used in the
production of these goods are not net losses to society as the indirect resources used
up are because some people value these goods and are willing to pay for them. Here it
is only because we classify these goods and services as illegal. Take cigarettes for
example, which are considered a production of an economic good so resources used
are not considered a loss to society, even though consumption of cigarettes do often
lead to indirect costs to society from extra health care resources expended and we do
count these as a net loss to society.
Involuntary transfers – Victimless crimes may also result in a transfer of income or
wealth. For involuntary transfers there is no net loss to society since it is just a transfer
from one member of society to another, so there is no net change even though some
members gain while others lose. One transfer is the lost income tax on illegally earned
income not reported, which means those who pay taxes have to pay more to make up
for this missing income. It is estimated that organized crime’s income from gambling
alone was $52 billion in 2005, which could be taxed if these activities were legalized.
Another type of transfer is property stolen, often times by drug addicts to support their
habits or prostitutes stealing from clients. Property crimes by prostitutes could be
reduced if we legalized prostitution since the victims would be able to report the
incident, which would increase the expected-punishment cost to prostitutes and reduce
the amount of these crimes.
Criminal justice system costs – our last category are costs imposed on us because
these crimes are illegal. Therefore, we must pay to have these activities monitored and
punishments enforced. In 2003, six victimless crimes (prostitution, drug abuse,
gambling, liquor law violations, drunkenness, and DUIs) accounted for 32% of total
arrests that year. This shows a substantial amount of our criminal justice resources are
spent on victimless crimes, so we might ask are these resources being well-spent? It is
important to point out that policing some of these crimes may lead to easier arrests,
such as drunkenness compared to burglary so arrest data might be misleading
indicators of resources expended on these crimes. Nevertheless, it is estimated that in
1994 we spent $50B ($66B in 2005 dollars) arresting and punishing people for
victimless crimes. Also, because some of these crimes involve corruption and bribery of
those in the justice system this imposes extra costs due to weakening the system.
Analytical Framework
In recent years the laws against some victimless crimes have been eased. For example,
public drunkenness is no longer a crime in over half the states, laws and penalties for
marijuana use have been decreased, “anything goes” adult entertainment centers
(which legalize prostitution within their boundaries) have been proposed, and almost all
states have a form of state run “numbers” games (lotto). The trend seems to be moving
towards either legalization or decriminalization for at least some of these types of crime.
Do you think this is an appropriate response to victimless crimes? Should they all be
legalized? It depends on the estimated costs and benefits associated with the change.
We will focus on comparing two extremes in terms of public policy: enforcement of
stricter penalties verses legalization.
Just like all other markets, there is a market for victimless crimes each with a supply
and demand curve. We will use the market of prostitution as an example. There is the
typical shaped demand and supply curves, and the intersection of these gives the
market equilibrium price and quantity. That output level has an associated amount of
production resources including employment level of labor as well as land and capital. It
also has associated costs to society, including criminal justice system costs. There are
also the same determinants that affect the supply and demand curves. For demand we
have changes in tastes, incomes, prices of related goods, etc.
Let’s consider the impact of pornographic literature on the prostitution market. Let’s
assume that these goods are complements, then if the price of pornographic materials
increases there will be a decrease in the demand for prostitution. The result in the
market is a decrease in the price of prostitutes and a decrease in the amount of
services purchased If the price of pornographic materials decreased instead, we would
get an increase in demand for prostitution and an increase in P and Q in the market.
What would happen if these two goods were substitutes instead? An increase in the
price of one would increase the demand of the other and vice versa. Whether these
goods are substitutes or complements is something that must be determined
empirically. It could happen be the case that there is a stronger relationship between
pornographic materials and violent crime such as rape rather than prostitution. Once the
relationship is known, we are able to analyze price changes in the market through a
supply and demand model.
The supply curve for prostitution is also subject to changes from its determinants. These
include the costs of doing business which include time (opportunity), materials, psychic,
and expected-punishment costs as well as the number of sellers in the industry. An
increase in any of these costs, such as an increase in the price of hotel rooms, will
decrease the supply. The result will be an increase in P and decrease in Q in the
market. An increase in the number of legal job opportunities for women would also
decrease supply. A decrease in the cost of business or increase in the number of sellers
would shift supply to the right and result in a decrease in P and increase in Q in the
Public Policy for Victimless Crimes
With this understanding of the market of prostitution we can now analyze the expected
changes of different public policies. Though we are focusing on the market to
prostitution here, the same analysis could be applied to any of our victimless crimes that
are considered to be “economic bads”.
The first policy is a “get tough” policy. Regardless of the specific tactics chosen this will
result in a greater enforcement of the law and/or increased punishment, either of these
will increase the expected-punishment costs. The impact on the market for the
economic “bad” depends on two things: 1) the magnitude of the increase, which
determines how much the curve(s) will shift and 2) whether we “get tough” on the buyer,
seller, or both, which determines which curves will shift. Typically, law enforcement
efforts focus on the sellers of economic “bads”, even though it is clear that if there were
no demand then there would be no supply. It is estimated that in the late 1980s 90% of
arrests for this crime were prostitutes (sellers) and the other 10% was for their Johns
(buyers). Therefore, we will assume that the focus is on sellers (mainly females) and
this will increase their expected punishments costs, decrease the supply in the market,
resulting in an increase in P and decrease in Q. This could result in an increase in the
unemployment rate. Why? Prostitutes are not counted in the labor market, so it is not
from losing their job as prostitutes but rather from them trying to find work in the legal
sector and initially not being very successful.
If the policy were to focus on increasing enforcement and punishment for buyers as
well, which more recent policy has done, then we would get an even larger decrease in
Q with an ambiguous change in P, depending on which curve shifted more. Analytically,
an increase in expected punishment costs can be looked as part of the transaction cost
for buyers, which is a complement good to the good being consumed. Therefore, when
transaction costs increase, the demand for the good will decrease.
So, does this kind of policy make economic sense? To answer this, we need an
accounting of the costs and benefits of the policy change. Clearly, a “getting tough”
policy will result in devoting more resources to law enforcement, unless existing
resources have been used inefficiently, and could be reorganized to produce more or
we reduce or eliminate some of the constraints which affect the use of law enforcement
resources such as rights to privacy. However, if neither of these are possible then we
must increase our spending on law enforcement to reduce prostitution.
The benefits of this increased spending will be reductions in all of the costs associated
with prostitution described earlier, with the exception of criminal justice costs. How large
and real some of these costs are is still open for debate, which impacts the size of the
associated benefits. If the benefits exceed the costs, the policy is efficient and
economically rational. If it is not, then society would be better off not making the change.
If “getting tough” on prostitution is inefficient, we can ask if a better policy would be the
opposite extreme and legalize prostitution.
Legalizing an economic “bad” will have impacts on both the supply and demand side of
the market. Therefore, the impact on the price and quantity in the market will depend on
the magnitude of these changes. We will start off with the demand side. The demand for
prostitution will change if tastes, income, or prices of related goods change. Legalization
will impact the tastes for prostitution. For consumers who taste for prostitution was
diminished because it was considered illegal, their tastes can be expected to increase.
There may be however some consumers whose taste will decline after legalization
because part of the attraction was the fact that it was illegal, but on net we would expect
an overall increase in tastes for prostitution. Another thing that can impact tastes would
be advertising. If additional money spent on advertising for prostitution lead to increased
tastes, then we would expect a further increase in the demand. Also, depending on the
type of advertising permitted and used, the negative externalities may be increased or
decreased. For example, if ads in the yellow pages replaced street walking then the
visibility of this good would be reduced along with the negative externality costs. Lastly,
legalization would also reduce the expected-punishment cost to buyers and since this is
considered part of transaction costs which are complementary goods, then one would
expect demand to further increase. Overall, the increase in demand from legalization
would increase the P and Q in the market.
Additionally, there would be impacts on the supply side caused from reduced expectedpunishment costs to the sellers. This will reduce the costs of production from the sellers
side and increase supply. Also, we can expect the number of sellers in the market to
increase since legalization will lift one barrier to entry in the market for prostitution, since
some sellers with high psychic costs may have been kept out of the market. Supply will
increase further and we can expect this change to result in a decrease in P and
increase in Q in the market.
The combined effect of increased demand and supply is an ambiguous change in P and
increase in Q, though it is reasonable to assume that the increase in supply would
dominate (resulting in a decrease in P and increase in Q). Overall, we get an increase in
the production and consumption of prostitution, meaning employment in the market will
increase. Competition in the market may increase as well. This largely depends on
whether the increase in production is primarily from existing firms in the market or if
there are new firms entering the market. This largely depends on if economies of scale
exist in the production of the product, meaning do large producers have a cost savings
benefit compared to smaller firms? If we have information about the production function
that tells us competition would increase, then we know that monopoly profits in the
industry will be removed and the quality of the product will likely increase.
The final question is whether legalization makes economic sense. What are the costs
and benefits to society by making this change in public policy? The costs will come in
the form of increased costs in some, but not all, of the costs associated with prostitution.
Negative externalities, like decreases social moral, are likely to increase, it may be the
case that there is no change in externalities if the decrease in visible externalities
offsets the increase in externalities from the increase in Q. However, if it does not offset
these costs then we know there will be an increase in these costs. The total amount of
this effect is hard to estimate.
Net losses are likely to drop, even though there is increased production and
consumption of the good. This is because increased competition would improve the
product or licensing may be required with certain health/sanitary standards imposed.
This would decrease the associated medical costs to buyers. Also, assaults on sellers
and would decrease since once it is legalized these incidents can be reported to police,
increasing the opportunity costs of these crimes, which represents benefits associated
with legalization.
Opportunity costs are eliminated by legalization. This is because these are the costs of
legal economic goods we sacrifice the production of to make illegal economic “bads”,
but once legalized these are considered economic goods.
Transfer costs are also reduced by legalization and represent benefits of the policy
change because incomes derived from prostitution can now be taxed. Robbery would
become more difficult since it could now be reported to police and increase the
expected punishment costs of prostitutes stealing property from their clients.
Lastly, criminal justice system costs would be reduced significantly. We would not
longer have to spend scare resources policing this activity and society would also feel
better about the justice system and that our resources were not being wasted since
issues of bribery and corruption would be erased.
Overall, it appears that on net society would benefit from the legalization of prostitution
and social welfare would be increased. However, there are some things we must
recognize before making this conclusion. First, are that even though negative externality
costs are hard to measure, we should not underestimate their true costs. Especially if
the negative externalities are mainly caused from something other than just the visibility
of the crime. These nonvisible externalities will continue to exist, at least in the
immediate future unless attitudes were to change (if ever).
Another thing to mention is that some of the benefits of legalization may be eliminated
or reduced if regulation is too strict. The reason for this is that extensive regulation may
cause the same kind of corruption or bribery of government officials. They may also
impose unnecessary monetary or psychic costs on those employed in the industry. For
example, in Nevada where it is legal some counties have established harsh regulations
on prostitutes including the hours they can be in the town, and what buildings and/or
residential areas that they are permitted. One town for example does not allow
prostitutes to have friends within that town. Therefore, if regulations are only used to
reduce negative externalities they can be justified. But if they restrict the civil liberties of
those legally employed in the market then they cannot be justified. We must make sure
we are not using regulation as a form of punishment to those working in a legal industry
that others may not approve of. Doing so may be just as expensive to society as
enforcing the existing laws against it. As a last point, we must make sure that there is
not another policy option that would increase society’s benefit even more than
legalization, if so then this policy should be pursued instead.

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