ECONOMICS OF

CRIME
Criminals base their decisions on the costs and benefits
of crime and respond to incentives

Some crimes are more costly to

prevent than to experience so
the socially efficient level of
crime is positive
 CRIME FACTS
• 2 types based on the objective of the crime:
• Personal crime
• Victim of a personal crime is placed in physical
danger
• Ojectives: to injure the victim or to steal a
property
• Propety crime
• Burglary, larceny or auto theft, etc.
Table 2. Average Monthly Crime Rate
by Region, 2010-2012
Region 2010 2011 2012
1 26.08 16.32 21.01
2 21.32 10.97 9.27
3 44.46 28.83 17.80
4-A 20.04 15.86 12.66
4-B 18.24 9.49 7.38
5 24.33 16.94 14.94
6 21.33 9.96 8.79
7 40.42 28.85 24.15
8 10.35 14.02 8.65
9 42.88 19.60 19.59
10 34.86 29.56 22.89
11 38.60 29.63 24.29
12 22.66 19.06 14.38
13 20.75 16.63 12.81
ARMM 2.76 2.03 2.06
CAR 76.12 37.00 53.74
NCR 28.15 32.83 38.57
 Table 1. Crime Volume and Crime Rate
per 100,000 Population, 2002-2012
Year Crime Volume Crime Rate
Index Crimes Non-Index Crimes

2002 85,776 108 54.6 52.4

2003 83,704 103 52.1 50.1

2004 77,253 93 51.1 41.4

2005 76,758 91 51.6 38.4

2006 71,227 83 47.8 34.1

2007 60,215 69 41.8 32.6

2008 66,846 75 40.4 33.5

2009 502,665 552 327.1 217.9

2010 324,083 350 218.0 208.0

2011 246,958 251 159.8 91.3

2012 217,812 227 134.8 92.4

• Crime volume It's the number that totals all crimes committed in an
area over a period of time. Crime volume is computed by adding the
total number of index and non-index crimes together.
• Crime rate is the crime volume relative to the population of a locality.
The United Nations attributes the country’s
high crime rate to the poor political and
economic environment. Venezuela has a
high murder rate, 82 per 100,000 people.
Venezuela also is a key country for drug
trafficking, as cocaine and other drugs
headed to the U.S. and Europe are routed
through Venezuela. Foreigners often are
targets for such crimes as murder and
kidnapping.
 VICTIMS OF CRIME
• Vicitmization rates
vary with income and
place of residence. In
US, another factor is
race.
COSTS OF CRIME
• Costs by victims
• Value of lost property
• Medical expenses for injuries
• OC of lost work time
• Pain and suffering
• Value of lives cut short
• Costs of Criminal justice system
• Costs of police
• Courts
• Correction facilities
 BEING A RATIONAL CRIMINAL

Economic principle:
BE A RATIONAL
THINKER
Criminals are rational like everyone else and commit
crime if BENEFITS > COSTS

• Crime is an uncertain enterprise and potential criminals

must consider the likelihood of different outcomes.
 ECONOMICS OF DOUBLE PARKING
• Suppose you have an opportunity to buy the last ticket to concert,
inorder to get it, you must double park your car, violating the law.
• If your consumer surplus of buying the ticket is $44, this is also
considered as your benefit in commiting the crime.
• Suppose you have 50 percent chance of getting caught and paying a
fine of $36, will you still double park?
• RISKS of DOUBLE PARKING
• A 50-50 percent chance of getting $44 or losing $36
• People differ in their willingness to take the risks associated with
crimes, as long as BENEFITS increases relative to the costs.
 What if you believe that violating the law is simply wrong?

• Most people have an

underlying aversion
to engage in an
antisocial behavior
and experience an
anguish cost when
they commit crime.
EXPECTED UTILITY AND DECISION TO COMMIT
CRIME
• Crime: Burglary
• Suppose a person can earn $100 in a lawful occupation
and can supplement this income with money earned in
weekly burglaries
• Objective: to maximize his expected utility and he will
choose either a lawful or a criminal life.
Utility curve shows the
relationship between
income and utility.

The utility curve is

concave : diminishing
marginal utility of
income- As income
increases, utility
increases but a
decreasing rate.

Utility is the square

root of income:
𝑈𝑡𝑖𝑙𝑖𝑡𝑦
= (𝐼𝑛𝑐𝑜𝑚𝑒)1/2
Compute the utility
associated with the
lawful and criminial
options
Lawful income= 100
Weekly burglary income= 44
If a person commits crime, the
probabillity of getting caught = 0.50
Prison term =0.36 units of time in
prison (3.6 years)
If caught, he lose any loot stolen and
supervision after being released.

Utility with 3 possible

outcomes.
Lawful option:
Income= 100
Utility= 10 (pt. c)

Successful criminal option:

Income= 144
Utility= 12 (pt. s)

Unsuccessful criminal:
Income= 64
Utility= 8 (pt. f)
Prison= 0.36 units
To earn lawful income=
0.64 units
 A POTENTIAL CRIMINAL DOESN’T KNOW AHEAD OF TIME
WHETHER HE WILL SUCCEED OR FAIL AT CRIME.

Expected utility of crime:

𝑬𝑼 𝑼𝟏 , 𝑼𝟐 , 𝒑𝟏 , 𝒑𝟐
= 𝒑𝟏 𝑼𝟏 + 𝒑𝟐 𝑼𝟐

Expected utility of crime:

𝑬𝑼 𝟏𝟐, 𝟖, 𝟎. 𝟓𝟎, 𝟎. 𝟓𝟎
= 𝟎. 𝟓 𝟏𝟐 + 𝟎. 𝟓 𝟖 = 𝟏𝟎 𝐮𝐭𝐢𝐥𝐬
The person will choose
crime if the EU of crime
exceeds the certain
utility of remaining
lawful.
If lawful utility=EU of crime, the
person is indifferent.
 PREVENTING CRIME
• The example shows that our
potential criminal is indifferent
between crime and a lawful
life.
• Inorder to balance away from
crime, we can change the
probability of imprisonment by
0.75
Expected utility of crime:
𝑬𝑼 𝟏𝟐, 𝟖, 𝟎. 𝟐𝟓, 𝟎. 𝟕𝟓
= 𝟎. 𝟐𝟓 𝟏𝟐 + 𝟎. 𝟕𝟓 𝟖 = 𝟗 𝐮𝐭𝐢𝐥𝐬

EU from crime < lawful utility

Increase in the certainty of

punishment decreases crime.
MORALITY AND ANGUISH COSTS
• In fact, most people have an aversion to committing
antisocial acts and they wont commit crime even if the
expected payoff is positive.
• Some people are less troubled by committing antisocial
acts.

• By incorporating morality: Anguish cost

• Cost of committing crime
Incorporating morality and anguish
costs helps explain why most people
don’t commit crime even when it
appears that the payoff of the crime is
positive
Probability of prison=0.25, so EU
=11 utils> lawful utility=10
With anguish cost= 2 utils, EU of
crime= 9 utils
EQUILIBRIUM QUANTITY OF CRIME
• We’ll take the perspective of criminals, using their benefit and
cost curves to show how much crime rational criminals commit.

• Cost of crime to the criminal is determined by 4 variables:

• Probability of being caught and imprisoned
• Length of the prison term
• OC of time spent in prison, which varies with income
• Anguish cost of crime, varies across individuals
• Supply curve shows the
relationship between the price
of crime and the number of
crimes committed.
• As the value of loot
increases, the quantity of
crime supplied increases.
• Supply curve is also a MC
curve
• Marginal benefit of a crime
is the loot taken
• Negatively sloped
because crime targets
vary in the amount of
loot available and the
difficulty in grabbing it
INCREASING THE CERTAINTY OF PUNISHMENT
• Increasing the certainty of
punishment can shift the
crime supply curve.
• Increase in the
probability of prison
increases the cost of
committing crime and
shifts supply curve
upward.

Deterrent effect of the

criminal-justice system:
when the probability of
prison increases, potential
criminals respond to the
higher cost by committing
fewer crimes
How responsive are criminals to
increases in the certainty of
punishment?

The estimated elasticity of

crime wrt probabilty of
imprisonment =-0.30:
A 10 percent increase in the
probability decreases crime by
about 3 percent.
INCREASING THE SEVERITY OF PUNISHMENT
• Determinants of supply curve: Studies suggests that
• Certainty of punishment longer prison sentences
• Length of the prison term don’t have much of an
effect on crime rates.
• Lawful opportunities
• Education

Longer prison terms cause other changes in the criminal

environment that offset the higher costs associated with
more time in prison
a. Hardening the criminal
Criminals have a relatively low aversion to
committing antisocial acts, and a longer prison term
may reduce their aversion further, making crime more
likely when they are released. A decrease in crime
anguish costs shifts the supply curve downward, at least
partly offsetting the deterrent effect of a longer prison
term.
b. Prison schooling
If prison allows a criminal to learn the tricks of the
trade from other criminals—or at least to learn from their
mistakes—a longer prison term means a more skillful
criminal.
BIG CITY CRIME AND THE CRIME DROP
• We can use the insights from the model of the rational
criminal to explain two observations.
• First, big cities experience higher crime rates than
small cities. Second, during the 1990s, crime rates for
both violent and property crime decreased by about a
third.
• Why Are Crime Rates Higher in Big Cities?
• Crime rates increase with city size.
Why are crime rates so much higher in big cities? Glaeser and Sacerdote provide three
reasons:
1. More loot (25 percent of difference). Big cities have more lucrative targets: The
average value per crime is about $900 in a city of 1 million, compared to a value of about
$550 in a small city.
2. Lower probability of arrest (15 percent of difference). As shown in Table 13–4 ,
bigger cities have lower arrest rates. Arrest rates are lower in big cities because (a) the
pool of suspects is larger and (b) lawful citizens in impersonal big cities are less inclined
to help their neighbors and the police in crime-control efforts.
3. More female-headed households (50 percent of difference). It’s not clear why crime
rates are higher in cities where a relatively large fraction of households are female
headed. The authors speculate that children raised in single parent families may have
fewer job skills and less powerful ethical restraints on criminal behavior.
A big city has a lower arrest
rate, so the cost of
committing crime is lower.
The lower cost generates a
lower supply (marginal cost)
curve.

There is more loot in big

cities, so the marginal
benefit curve is higher.

Lower marginal cost and

higher marginal benefit
leads to a higher crime rate
in the big city.
 WHY DID CRIME RATES DECREASE IN THE
1990S?

According to Levitt (2004):

a. Strong Economy
b. Demographics
c. Police techniques
d. Increase in police
e. Increase in prisoners
f. Decrease in crack
cocaine sales
HOW MUCH CRIME?
• A society can use its resources—labor, capital, and
land—in different ways to promote economic well-
being.

• The question is whether such a dramatic reduction in

crime would be socially efficient. As we’ll see, the
reason we tolerate so much crime is that some crimes
are more costly to prevent than to experience.
OPTIMAL AMOUNT OF CRIME
• Consider a society’s choice
of how much burglary to
allow.
• Prevention:
• Increase the certainty
and severity of
punishments
• Invest in security
measures
 Government must imposed longer
Starting at pt.P, if we don’t allocate any prison terms and to use more
resources to crime prevention, there will be resources to prevent more serious
100 crimes crimes.

The marginal cost curve indicates that the

cost of preventing a single crime (reducing
crime from 100 to 99) is $300.

The socially efficient quantity of

crime minimizes the sum of
prevention and victim costs. The
total cost is minimized where the
two marginal-cost curves
intersect, which happens at point
b , with 70 burglaries.
• Criminals have options too. We, as a society, pick a set of crime
penalties, one for each type of crime (e.g., one year for burglary,
three years for armed robbery), providing criminals with a menu of
crime penalties. Criminals respond by picking the most lucrative
crime, given the penalty menu and the payoffs from different crimes.

• The principle of marginal deterrence is that penalties should increase

with the victim cost of crime.

• The challenge for crime policy is to develop a penalty menu that

generates the mix of crimes that minimizes the social cost of crime.
CRIME SUBSTITUTION AND THE PRINCIPLE OF
MARGINAL DETERRENCE
 THE ROLE OF PRISONS
• Specifically, we look at three ways that prisons decrease
crime:
• Deterrence. The threat of being locked up in prison
persuades some people not to commit crime.
• Incapacitation. Isolating criminals from potential victims
prevents crime.
• Rehabilitation. Prisons may improve the attitudes or skill
level of convicts, making them less likely to commit crimes
after they leave.