What is the socially efficient level of crime?

Raphael Conte, Sir William Borlase's Grammar School, United Kingdom

Winner of the 2020 Economics Prize ​| 10 min read 

In this essay, it is argued that the socially efficient level of crime is actually significantly above nil, despite rampant social costs, due to the necessary trade-off between prevention expenditure and costs inflicted by crimes, as well as the potential beneficial effects of crime.[1] However, it must be recognised that there is no ‘simple relationship’ between crime and social costs derived from it, although cost-benefit analysis supplemented by case studies provides an indication.[2] Firstly, there are the social costs of crime with an added opportunity cost dimension. Secondly, there are prevention costs followed by the potential social benefits. Finally, the use of fines may help to determine a socially efficient level. Here, crime refers to various acts that imply a transgression of social norms and are punishable by law, from financial crimes to homicide, although naturally “crime” can have varying definitions, within different legal systems.

In this context, ‘social efficiency’ can be characterised as taking all the consequences of crime on all economic agents into consideration.[3] Specifically, social efficiency can be defined as: marginal social costs totalling marginal social benefits (MSC=MSB) with social costs divided into preemptive prevention costs and the social costs of the crimes expenditure and costs inflicted by crimes, as well as the potential beneficial effects of crimes themselves.[4] Therefore, in order to minimise overall social costs, the marginal cost of preventing crime should equal the marginal social cost of crime (MCp=MSC). If MCp>MSC of crime, then crimes are more costly to prevent than allowing them to occur, thus contributing to a higher overall social cost. Contrastingly, if MCp<MSC, then crime could have been prevented at a lower social cost than the social cost inflicted by the crime.

However, it can be argued that the socially efficient level of crime is nil as it is ‘the primary source of inefficiency in the economy,’ effectively ‘bypassing the market.’[5] [6]Principally, external costs involved in crime can be so considerable that it should not be present at all. This includes costs attached to crime which can be divided into apprehension, conviction and punishment costs.[7] Firstly, apprehension costs can be estimated using UK police spending, which was £14,063m in 2019-20. [8]Secondly, average unit conviction costs range from £200 for commercial theft to £800,980 for homicide. [9]Thirdly, incarceration cost the taxpayer £2,753,747,261 in the UK in 2015, i.e. £32,510 per prisoner. [10]In 2018-19, the total Ministry of Justice operating expenditure was £10 billion, with an income of £1.6 billion.[11] Similar statistics in the US are even more alarming with criminal justice system expenditure in 2012 amounting to $210 billion.[12] Such sums exemplify the huge social costs of crime, suggesting that the optimum level is close to nil, if not absolute zero.

Additionally, there are considerable social costs as consequences of crime, such as the lost output of crime victims. For example, in the UK, the average cost of lost productivity for violent crime victims is £2,060 (5 hours off work and 36 reduced productivity hours).[13] The same rationale can be used to estimate the social costs of crime regarding healthcare costs. For the same crime, average unit costs of healthcare amount to £920.[14] Moreover, there are also large anticipatory and reactionary social costs, notably defensive precautions taken by potential victims. This includes a range of measures such as insurance, locks, doors, private CCTV and alarms, with UK cost estimates ranging from £3bn to £4bn to around £25bn.’[15] This allocation of resources to hinder crime naturally inflicts significant monetary and psychological costs to society, although it does provide employment and other economic benefits. Similarly, resources used to commit a crime also represent costs to society.[16] [17]Here, an opportunity cost dimension must be added to fully capture the argument.[18] Principally, the criminals’ human and physical capital could have been utilised to contribute to the productive potential of the economy, creating potential social gains instead of inflicting high social costs through crime. This opportunity cost also includes the resources expended by potential victims to protect themselves from crime. The next best alternative may have been expenditure on goods and services to improve real living standards.

However, it can also be argued that the socially efficient level of crime is relatively high because resources allocated towards prevention can generate an even greater burden on society than if some crimes were allowed to occur (MCp<MSC). This is corroborated by Friedman stating that ‘theft is inefficient, but spending $100 to prevent a $10 theft is more inefficient.’[19] The following analysis can be divided into the high monetary and non-monetary costs of prevention.

On a monetary level, such high costs would take the form of expenditure on human and physical resources such as enhanced police presence and surveillance. Although this creates employment, an opportunity cost is still presented. In order to estimate the expenditure required to bring crime levels close to 0, the example of Singapore can be used where high penalties are coupled with high policing expenditure of over $200 US per capita[20] to achieve a relatively low crime rate of 617 per 100,000 with an intentional homicide rate of 0.7 per 100,000.[21] [22]This also implies that innumerable resources would be required to achieve a point where crime was virtually nil, inflicting even greater social costs through taxation than the crimes themselves.

Non-monetary costs of prevention also suggest that the socially efficient level of crime is well above nil. These social costs focus on the infringements of citizens’ rights and liberties, such as freedom of assembly and movement, which would undoubtedly be restricted by a police state seeking extremely low levels of crime. A relevant example for this is the former GDR where the Secret Police crushed crime and dissent through ‘increased social control, draconian state sanctions and reduced opportunity structures.’[23] However, this inevitably led to spiralling long-term social costs with recent articles stating that ‘memories of the police state continue to exact a profound psychological toll,’ even 30 years after German reunification.[24] As a consequence of the actions of the Stasi, psychologists have diagnosed various conditions, including post-traumatic stress disorder, anxiety and depression.[25] Overall, this case study demonstrates how efforts to reduce crime to very low levels tend to lead to far greater social costs than those actually created by crimes themselves. This example shows the lasting harm of such measures. Even if a more social-liberal rather than authoritarian approach was taken, as in Scandinavian countries, whereby the incentive to commit crime is reduced through redistributive measures, costs would remain high and crime would probably persist. Even today, economists argue that in the USA, ‘spending less on policing would increase social welfare.[26]

However, the idea that prevention is better than cure can also be applied with regard to crime. Although it is very difficult to calculate the social benefit stemming from preventative measures, a study of CCTV (closed-circuit television) suggests that the trade-off between infringement on civil rights and liberties and reducing crime is not as great as commonly perceived. Firstly, it is accepted that ‘CCTV can, when properly implemented and monitored, be effective at reducing crime.’[27] However, Roman and Farrell also argue that ‘there is evidence that CCTV can be introduced without infringing upon people's freedoms.’[28] Similarly, the argument regarding the infringement on civil liberties is weakened by the fact that it is arguing ‘for a right to anonymously commit crime.’[29] Therefore, as technology develops, it can be argued that the trade-off between prevention and social costs created is becoming less applicable, suggesting that the socially efficient level will decrease in the long-term.

Secondly, it can be claimed that the socially efficient level of crime in some circumstances is perhaps surprisingly high, due to the potential social benefits. This is particularly significant in relation to redistributive crimes such as theft and fraud which are effectively transfer payments. From a utilitarian perspective, if some resources are reallocated from wealthier agents to poorer agents, then total utility for the overall population increases. This is explained by the law of diminishing marginal utility which states that less affluent agents have higher levels of marginal utility, i.e. an increase in their resources will dramatically improve living standards. If crime can have this effect, then this may be able to improve development outcomes. From a macroeconomic perspective, the transfer will increase consumption, a key component of aggregate demand (AD=C+I+G+(X-M)) (AD-AD1) due to poorer individuals’ higher marginal propensity to consume which could, in turn, lead to an expansion of GDP (Y-Y1). This suggests that a certain type and level of crime can lead to economic benefits. However, the net improvement is likely to be marginal and will reduce long-term consumption trends. From a microeconomic perspective, if a poor thief were more likely to purchase merit goods and the wealthy were more likely to buy demerit goods, then crime would be contributing to correcting market failures caused by negative externalities.

However, redistributive crimes are also committed by prosperous individuals and firms through tax evasion. Additionally, the proceeds of organised crime are unlikely to be invested in social capital but tend to be used to fund further crime. Moreover, crimes such as counterfeiting, ‘theft by false pretenses,’ can have significant social costs such as resulting demand-pull inflation and the inefficient use of resources required for counterfeiting, undermining the redistributive effect.[30] At the core of the redistributive argument, which states that the private benefits to the criminal partially negate the private cost, lies the ethical dilemma that the ‘criminal’s illicit gain should not count as a social benefit.’[31] Furthermore, if crime is allowed to rise to dangerous levels, then the incentive to accumulate wealth legally may erode, increasing the risk of capital and labour flight, inflicting vast social costs. To summarise, it is inefficient to allow ‘pure coercive transfers of wealth.’[32]

However, social costs can be minimised in many cases by applying fines, the most common form of punishment used today.[33] Primarily fines do not consume social resources, but act as a transfer payment. Acting as a Pigouvian tax, fines can internalise the externality and correct the inefficient outcomes caused by crime. This is illustrated by the diagram below, with the social optimum being: MPC+ fines = MSC. Moreover, fines may avoid an expensive prison system. ‘Indeed, fines are so cheap to administer that they yield a profit to the state.’[34] Overall, this suggests that minor offences sanctioned by fines generate a small social cost, supporting the argument that the socially efficient level is greater than nil. Alternatively, community service could be used more extensively to offset crime-induced social loss.

However, the use of fines to determine a socially efficient level of crime is ethically questionable,  inflicting  potentially  long-term  social  costs  as  they  ‘permit  offences  to be bought  for  a  price.’[35] Additionally,  debates arise as to how fines should be calculated, inevitably causing government failure and further inefficiencies. Furthermore, some crimes are arguably ‘so heinous that no amount of money could compensate for the harm inflicted,’ making fines unsuitable.[36] This also exposes further difficulties when attempting to establish a socially efficient level as the value is wholly dependent on the types of crime committed. However,  while redistributive crimes can imply some inefficiencies,  so-called  ‘efficien crimes’[37] do exist, suggesting that the social optimum is not absolute zero. Reasoned speeding is a common example used to justify this argument as there may be times where the potential cost of an accident is less than the benefits of speeding. However, this can be ethically doubtful, due to the subjectivity of this concept.

Overall, despite best attempts, crime is an inevitable social evil. Hence, instead of devoting more resources to combat it, increasing the burden on the taxpayer, criminal law should ensure that crime delivers as few social costs as possible through efficient punishments or perhaps through the legalisation of some acts such as the possession and supply of Class B drugs such as cannabis. Accordingly, the socially efficient level of crime varies according to the offence, but is perhaps greater than commonly assumed, although it is impossible to give a conclusive value.

Footnotes

1 Friedman, D., n.d. Crime. [online] Econlib. Available at: <https://www.econlib.org/library/Enc/Crime.html> [Accessed 30 April 2020].

2 Skogh, G. and Stuart, C., 1982. An Economic Analysis of Crime Rates, Punishment, and the Social Consequences of Crime. Public Choice, [online] 38(2), p.171. Available at: <https://www.jstor.org/stable/30023585?seq=1> [Accessed 30 April 2020].

3 Bohm, P., 1987. Social Efficiency: A Concise Introduction To Welfare Economics. 2nd ed. [ebook] London: Macmillan Education Ltd., p.xii. Available at: <https://link.springer.com/content/pdf/bfm%3A978-1-349-18786-7%2F1.pdf> [Accessed 30 April 2020].

4 Cooper, R. and Ulen, T., 2013. AN ECONOMIC THEORY OF CRIME AND PUNISHMENT CHAPTER 11. [ebook] Pearson, p.471. Available at: <http://web4.uwindsor.ca/users/m/mfc/41240.nsf/831fc2c71873e46285256d6e006c367a/10ff8b04ff3a317885256d88005720f6$FILE/C&U4thchpt11.pdf> [Accessed 30 April 2020].

5 Ferraz, E. and Soares, R., 2018. Socially Optimal Crime And Punishment. [ebook] p.13. Available at: <https://www.fea.usp.br/sites/default/files/anexoevento/socp_ferraz_soares.pdf> [Accessed 30 April 2020].

6 Posner, R., 1985. An Economic Theory of the Criminal Law. Columbia Law Review, [online] 85(6), p.1195. Available at: <https://pdfs.semanticscholar.org/6448/aee7b1aaa0785667ee8f0ba4fb7e9fe0a3c0.pdf>.

7 Becker, G., 1968. Crime and Punishment: An Economic Approach. Journal of Political Economy, [online] 76(2), p.207. Available at: <http://links.jstor.org/sici?sici=0022-3808(196803/04)76:2%3C169:CAPAEA%3E2.0.CO;2-I> [Accessed 30 April 2020].

8 Home Office, 2019. Police Funding For England & Wales 2015-2020 Statistical Bulletin. London, p.6.

9 Home Office, 2018. The Economic And Social Costs Of Crime Second Edition Research Report 99. London, p.58.

10 Ministry of Justice, 2016. Costs Per Place And Costs Per Prisoner By Individual Prison National Offender Management Service Annual Report And Accounts 2015-16 Management Information Addendum. London: Ministry of Justice Press Office, p.3.

11 House of Commons Library, 2019. The Spending Of The Ministry Of Justice Debate Pack. London, p.3.

12 Ferraz, E. and Soares, R., 2018. Socially Optimal Crime And Punishment. [ebook] p.1. Available at: <https://www.fea.usp.br/sites/default/files/anexo-evento/socp_ferraz_soares.pdf> [Accessed 30 April 2020].

13 Home Office, 2018. The Economic And Social Costs Of Crime Second Edition Research Report 99. London, p.42.

14 Ibid. p.46.

15 Ibid. p.23.

16 Skogh, G. and Stuart, C., 1982. An Economic Analysis of Crime Rates, Punishment, and the Social Consequences of Crime. Public Choice, [online] 38(2), p.171. Available at: <https://www.jstor.org/stable/30023585?seq=1> [Accessed 30 April 2020].

17 Ibid.

18 Cooper, R. and Ulen, T., 2013. AN ECONOMIC THEORY OF CRIME AND PUNISHMENT CHAPTER 11. [ebook] Pearson, p 471. Available at: <http://web4.uwindsor.ca/users/m/mfc/41240.nsf/831fc2c71873e46285256d6e006c367a/10ff8b04ff3a317885256d88005720f6/$FILE/C&U4thchpt11.pdf> [Accessed 30 April 2020].

19 Friedman, D., n.d. Crime. [online] Econlib. Available at: <https://www.econlib.org/library/Enc/Crime.html> [Accessed 30 April 2020].

20 Farrell, G. and Clark, K., 2004. WHAT DOES THE WORLD SPEND ON CRIMINAL JUSTICE?. [ebook] Helsinki: The European Institute for Crime Prevention and Control, p.16. Available at: <https://www.heuni.fi/material/attachments/heuni/papers/6KtlkZMtL/HEUNI_papers_20.pdf> [Accessed 13 May 2020].

21 Ibid.

22 Hirschmann, R., 2020. Singapore: Crime Rate 2019 | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/628339/crime-rates-in-singapore/> [Accessed 13 May 2020].

23 Kury, H. and Smartt, U., 2001. The Changing Face Of Germany's Crime Rate Since Unification. [ebook] Centre for Crime and Justice Studies, p.47. Available at: <https://www.crimeandjustice.org.uk/sites/crimeandjustice.org.uk/files/09627250108553673.pdf> [Accessed 30 April 2020].

24 Bailey, C., 2019. The Lingering Trauma of Stasi Surveillance. The Atlantic, [online] Available at: <https://www.theatlantic.com/international/archive/2019/11/lingering-trauma-east-german-police-state/601669/> [Accessed 30 April 2020].

25 Ibid.

26 Ferraz, E. and Soares, R., 2018. Socially Optimal Crime And Punishment. [ebook] p.31. Available at: <https://www.fea.usp.br/sites/default/files/anexo-evento/socp_ferraz_soares.pdf> [Accessed 30 April 2020].

27 Roman, J. and Farrell, G., n.d. COST-BENEFIT ANALYSIS FOR CRIME PREVENTION: Opportunity Costs, Routine Savings And Crime Externalities. [ebook] pp.80, 81. Available at: <http://www.socialvalueuk.org/app/uploads/2016/03/cba%20for%20crim%20prevention.pdf> [Accessed 30 April 2020].

28 Roman, J. and Farrell, G., n.d. COST-BENEFIT ANALYSIS FOR CRIME PREVENTION: Opportunity Costs, Routine Savings And Crime Externalities. [ebook] pp.80, 81. Available at: <http://www.socialvalueuk.org/app/uploads/2016/03/cba%20for%20crim%20prevention.pdf> [Accessed 30 April 2020].

29 Ibid.

30 Posner, R., 1985. An Economic Theory of the Criminal Law. Columbia Law Review, [online] 85(6), p.1198. Available at:

<https://pdfs.semanticscholar.org/6448/aee7b1aaa0785667ee8f0ba4fb7e9fe0a3c0.pdf

31 Cooper, R. and Ulen, T., 2013. AN ECONOMIC THEORY OF CRIME AND PUNISHMENT CHAPTER 11. [ebook] Pearson,

p.471. Available at: <http://web4.uwindsor.ca/users/m/mfc/41-240.nsf/831fc2c71873e46285256d6e006c367a/10ff8b04ff3a317885256d88005720f6/

$FILE/C&U4thchpt11.pdf> [Accessed 30 April 2020].

32 Posner, R., 1985. An Economic Theory of the Criminal Law. Columbia Law Review, [online] 85(6), p.1196. Available at: <https://pdfs.semanticscholar.org/6448/aee7b1aaa0785667ee8f0ba4fb7e9fe0a3c0.pdf

33 Becker, G., 1968. Crime and Punishment: An Economic Approach. Journal of Political Economy, [online] 76(2), p.193. Available at: <http://links.jstor.org/sici?sici=0022-3808(196803/04)76:2%3C169:CAPAEA%3E2.0.CO;2-I> [Accessed 30 April 2020].

34 Cooper, R. and Ulen, T., 2013. AN ECONOMIC THEORY OF CRIME AND PUNISHMENT CHAPTER 11. [ebook] Pearson, p.474. Available at: <http://web4.uwindsor.ca/users/m/mfc/41-240.nsf/831fc2c71873e46285256d6e006c367a/10ff8b04ff3a317885256d88005720f6/

$FILE/C&U4thchpt11.pdf> [Accessed 30 April 2020].

35 Becker, G., 1968. Crime and Punishment: An Economic Approach. Journal of Political Economy, [online] 76(2), p.196. Available at: <http://links.jstor.org/sici?sici=0022-3808(196803/04)76:2%3C169:CAPAEA%3E2.0.CO;2-I> [Accessed 30 April 2020].

36 Ibid.

37 Friedman, D., n.d. David Friedman, Price Theory: Chapter 20: The Economics Of Law And Law Breaking. [online] Daviddfriedman.com. Available at:

<http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_20/PThy_Chapter_20.html> [Accessed 30 April 2020].

Bibliography

Becker, G., 1968. Crime and Punishment: An Economic Approach. Journal of Political Economy, [online] 76(2), pp.191, 193, 196, 207. Available at:

<http://links.jstor.org/sici?sici=0022-3808(196803/04)76:2%3C169:CAPAEA%3E2.0.CO;2-I> [Accessed 30 April 2020].

 

Bohm, P., 1987. Social Efficiency: A Concise Introduction To Welfare Economics. 2nd ed. [ebook] London: Macmillan Education Ltd., p.xii. Available at:

<https://link.springer.com/content/pdf/bfm%3A978-1-349-18786-7%2F1.pdf> [Accessed 30 April 2020].

 

Cooper, R. and Ulen, T., 2013. AN ECONOMIC THEORY OF CRIME AND PUNISHMENT CHAPTER 11. [ebook] Pearson, pp.445, 47, 474. Available at:

<http://web4.uwindsor.ca/users/m/mfc/41-240.nsf/831fc2c71873e46285256d6e006c367a/10ff8b04ff3 a317885256d88005720f6/$FILE/C&U4thchpt11.pdf> [Accessed 30 April 2020].

 

Farrell, G. and Clark, K., 2004. WHAT DOES THE WORLD SPEND ON CRIMINAL JUSTICE?. [ebook] Helsinki: The European Institute for Crime Prevention and Control, p.16. Available at:

<https://www.heuni.fi/material/attachments/heuni/papers/6KtlkZMtL/HEUNI_papers_20.pdf> [Accessed 13 May 2020].

 

Ferraz, E. and Soares, R., 2018. Socially Optimal Crime And Punishment. [ebook] pp.1, 2, 13, 31. Available at: <https://www.fea.usp.br/sites/default/files/anexo-evento/socp_ferraz_soares.pdf> [Accessed 30 April 2020].

 

Friedman, D., n.d. Crime. [online] Econlib. Available at: <https://www.econlib.org/library/Enc/Crime.html> [Accessed 30 April 2020].

Friedman, D., n.d. David Friedman, Price Theory: Chapter 20: The Economics Of Law And Law Breaking. [online] Daviddfriedman.com. Available at:

<http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_20/PThy_Chapter_20.html> [Accessed 30 April 2020].

 

Hirschmann, R., 2020. Singapore: Crime Rate 2019 | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/628339/crime-rates-in-singapore/> [Accessed 13 May 2020].

 

Home Office, 2019. Police Funding For England & Wales 2015-2020 Statistical Bulletin. London, p.6.

 

Home Office, 2018. The Economic And Social Costs Of Crime Second Edition Research Report 99. London, pp. 23, 42, 46.

 

House of Commons Library, 2019. The Spending Of The Ministry Of Justice Debate Pack. London, p.3.

 

Ministry of Justice, 2016. Costs Per Place And Costs Per Prisoner By Individual Prison National Offender Management Service Annual Report And Accounts 2015-16 Management Information Addendum. London: Ministry of Justice Press Office, p.3.

 

Posner, R., 1985. An Economic Theory of the Criminal Law. Columbia Law Review, [online] 85(6), pp.1195, 1196, 1198. Available at: <https://pdfs.semanticscholar.org/6448/aee7b1aaa0785667ee8f0ba4fb7e9fe0a3c0.pdf

 

Roman, J. and Farrell, G., n.d. COST-BENEFIT ANALYSIS FOR CRIME PREVENTION: Opportunity Costs, Routine Savings And Crime Externalities. [ebook] pp.80, 81. Available at:

<http://www.socialvalueuk.org/app/uploads/2016/03/cba%20for%20crim%20prevention.pdf> [Accessed 30 April 2020].

 

Skogh, G. and Stuart, C., 1982. An Economic Analysis of Crime Rates, Punishment, and the Social Consequences of Crime. Public Choice, [online] 38(2), p.171. Available at:

<https://www.jstor.org/stable/30023585?seq=1> [Accessed 30 April 2020].

education@johnlocke.com

+44 (0)1865 566166 (UK)

+1 (609) 608-0543 (US)