Crime is a major activity , with implications for poverty and the allocation of public and private resources. The economics of crime focuses on the effect of incentives on criminal behavior, the way decisions interact in a market setting; and the use of a benefit-cost framework to assess alternative strategies to reduce crime.By putting crime into a market setting, economic analysis highlights the difficulty of reducing crime through incapacitation: when the elasticity of supply to crime is high, one criminal replaces another in the market; and thus the importance of deterring crime by altering behavior.
Models for the economics of crime are easily described in a supply-and-demand framework in which criminals supply crime, the public at large demands protection from crime, and the government provides public protection. The model can be used to show how crime responds to a variety of demographic and eco-nomic factors and what results to expect from public policy proposals. As with all economic models, the economic model of crime assumes actors who try to make rational economic choices. The three sets of actors usually considered are the criminals, noncriminal households and legitimate businesses, and the government. In the simplest possible framework, criminals determine the supply of crime, the rest of society determines the de- mand for crime (protection), and the government affects both (directly on demand and indirectly through supply).
Criminals determine the supply of crime, the rest of society determines the demand for crime (protection), and the government affects both (directly on demand and indirectly through supply).
Though at first the concept of “demand for crime” may sound like an oxymoron, it can be easily explained in terms of two elements.
First, there is the direct demand for (the spoils of) crime, whereby the quantity demanded falls as the loot falls, just like any other market good except that the market in this case is part of the shadow economy.
Second, there is an indirect demand for crime, which is an inverse demand for protection and insurance and is also negatively related to the payoff of criminal activities. This negative relationship arises because as crime rises individuals step up private efforts at protection (ranging from locking their doors to hiring security personnel and so on), which increase the direct cost of criminal activity and therefore reduce the payoff to crime. The demand curve shifts to the left for any change to household conditions that decreases the payoff to crime for a given rate of crime. Examples include reductions in material well-being or economic growth or an increase in private vigilance.
The final actor is the government. The government is assumed to be moving the equilibrium toward a (lower) crime rate that has higher social welfare. Economists assume that governments attempt to equate the marginal cost of crime to the marginal social benefit of spending additional moneys on crime prevention for all categories of crime.However, the government does not operate in isolation but under bureaucratic and political constraints that can distort its effectiveness but are not usually considered in simple models. Government anticrime actions can be seen as the public component of the demand curve. The public demand for crime is also negatively sloped because as crime increases the public will respond by stepping up efforts to battle crime, ultimately making crime more costly to the criminal. In particu-
lar, the expected future cost of crime (being caught) increases so that the net return to crime falls. Thus, there is an inverse relationship between the net return to crime and the crime rate from the public demand side.
Finally, to foreshadow an issue that is important in empirical crime analyses, while it is clear that public efforts to combat crime should reduce the crime rate, this correlation is not always clear. The difficulty is that correlations sometimes fail to distinguish between exogenous shocks and endogenous comovements. For example, more effective police efforts should to some extent reduce crime rates. Thus one would see a negative correlation between crime and police efforts.
However, not all police actions are exogenous—that is, independent from crime (or predetermined).Much police activity is in response to perceived changes in criminal activity. Thus, if crime increases for a reason
completely unrelated to the crime itself, police activity will increase, too, and the crime and police efforts will be positively related even though exogenous increases in police efforts reduce crime.
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