Crime, Punishment and Deterrence - Markets for Illegal Activities and the Economics of Public Law Enforcement

Introduction

In previous chapters we examined legal rules that govern private harms and breaches of private agreements. This chapter analyses markets for illegal activities, which are thought to generate a more widely dispersed kind of social harm and which, in general, cannot be perfectly detected or enforced.

Individuals face two kinds of costs when contemplating whether to commit an illegal act: the cost of the activity itself, and the expected punishment that they may face. The economic approach to crime treats the expected punishment as a 'price' which individuals take into account when choosing whether to commit a crime. In modern economies punishments usually take the form of monetary fines or imprisonment terms. But there are also other types of punishment, including social norms and community 'shaming' or stigmas attached to certain kinds of behaviour.

This chapter introduces a simple analytical framework to examine the incentive effects of monetary fines and imprisonment terms. Efficient deterrence and enforcement policy is examined as a standard cost-benefit problem. Within this structure we also examine two kinds of legal rules: strict criminal liability and fault-based criminal liability.

The chapter is structured as follows. Section 9.2 introduces the basic approach to crime and punishment that is used throughout the chapter, and examines the welfare effects of fines, imprisonment and enforcement activities. Section 9.3 applies this approach to markets for illegal activities, and considers several applications, including evasion of specific taxes. Section 9.4 examines the issue of plea bargaining, whilst section 9.5 analyses the economics of organised crime.