Making risky choices: The economics of crime Week 1

Question 1

Economics of crime overview

Answer 1

1. Decision to commit a crime is considered a rational one: analysed as a choice based on costs and benefits of different outcomes
2. Driven by consequences of different choices - differ depending on available opportunities
3. How does education impact decision to commit a crime? - consider how school dropout limits opportunities to make a better living

Question 2

Why do some people participate in criminal activities?

Answer 2

• Some crimes have little or no economic basis e.g., emotionally driven murder
  -Others have a stronger economic basis - choices can be considered the result of some kind of cost-benefit calculation, e.g., burglary, robbery etc - benefits/rewards of crime = source of potential consumption utility for the criminal
• Opportunity cost of crime - people with more to lose are less likely to commit crime - crime can be reduced by influencing opportunities for potential offenders
• link between crime and unemployment

Question 3

The decision to commit the risky criminal activity (equation)

Answer 3

• Commit the crime if: expected benefits - expected costs > net benefits of next best option (the opportunity cost)
• If not caught payoff = Π (benefits/motivation for the crime)
• If caught penalty = C and lose Π (direct/explicit and implicit(risky) costs of crime)
• Next best option = J (no/less risk) (opportunity costs)

Immediate benefits likely to be less than Π but benefits extend into the future - present value depends on the individual’s discount rate reflecting their time preferences

Question 4

Crime as a risky business venture

Answer 4

Benefits: Money + satisfaction (e.g., status, thrill).
Costs: Risks (getting caught) + lost opportunities (better job or reputation).
Criminals analyze this like entrepreneurs running a business.
Psychic income = benefits from personal satisfaction (utility) e.g. due to lifestyle, kudos
Implicit costs = risk of being caught and punished and consequently losing social status/standing

Question 5

Crime as a risky business - What does implicit costs depend on?

Answer 5

Implicit cost of crime = what you “pay” when things go wrong

1. Chance of getting caught (Pc):
   - Higher risk of getting caught = higher cost for the criminal
   - Lower risk = lower cost
2. Losing benefits/profits if caught
3. Penalties (C):
   -Bigger punishments (like long jail time or heavy fines) = bigger costs
   - smaller penalties = lower costs
4. Material penalties:
   - These are physical or financial consequences, like paying fines or going to jail
5. Psychic costs:
   - Losing your reputation (stigma) or feeling guilty
   - Emotional and mental costs

Question 6

The decision to commit the risky criminal activity

Answer 6

People commit crimes if:
(1 - Pc)U(Π) - PcU(C) > U(J)
(1 - Pc) = Chance of getting away with it.
Pc = Risk of being caught.
U(Π) = Payoff if successful.
U(C) = Penalty if caught.
U(J) = Rewards from a non-criminal job.

Question 7

People avoid crime if: (1-Pc)U(Π) - PcU(C) > U(J)

Answer 7

• Payoff from crime (Π) is low.
• The higher the detection rate, Pc
• The higher the penalty if caught, C
• The higher the benefits fo the non-criminal option, J
• The more risk adverse they are (crime is a gamble)
• The less their time preference for money now compared with money in the future