Cost Benefit Analysis of

Economic Crimes
 Introduction
• Various studies have elaborated on the benefits and costs of crime.
• All the costs and benefits which have an effect on the people’s decisions
are included in the economic models of criminal behaviour.
• People are assumed to allocate time to criminal activity until marginal
benefits equal marginal costs.
Time Allocation  MR=MC
• For some people marginal benefits are probably always lower than
marginal costs. If MR<MC always then
• In such cases we then have a law-abiding person.
• Some people specialise in crime
• Most of us commit an offense now and then
 Types of Costs and Benefits
• The type of gains from criminal act depend on type of crime and the
individual criminal
• Monetary, Psychic.
• Monetary- theft, robbery, insurance fraud, etc
• Psychic- thrill of danger, peer approval, retribution, sense of
accomplishment, or “pure” satisfaction of wants (rape)
• Costs types - material costs, psychic costs, expected punishment costs, and
opportunity costs.
• Material costs (equipment, guns, vehicles)
• Psychic costs (guilt, anxiety, fear, dislike of risk)
 Types of Costs: Expected punishment costs - Formal
and Informal
• The punishment costs include all formal and informal sanctions, as well as
pecuniary costs arising from lawsuits (lost income and lawyer’s fee).
• The formal sanctions include fines, various forms of incarceration, etc.
• The more severe these sanctions are, the higher the cost.
• The informal sanctions include any personal inconveniences connected
with arrest, trial, and conviction.
• The sanctions related to the social stigma caused by arrest and formal
sanctions must be added.
• The nuisance associated with appearing in court, and the reactions of
employer, family and friends might have a stronger effect than formal
sanctions
 Types of Costs: Opportunity Cost
• The opportunity cost of crime consists of the net benefit (gross benefit
minus cost) of the legal activity forgone while planning, performing and
concealing the criminal act.
• The lower an individual’s level of income, the lower is his or her
opportunity cost of engaging in illegal activity.
• The amount a person can earn in the legal sector may depend on factors
such as age, sex, race, education, training, region, rate of unemployment,
and IQ
• If earning ability is low then opportunity cost crime is low
• This is the reason according to statistics why young people, men,
minorities, and low-paid workers are involved in crimes
• Further empirical studies are necessary to substance the relationship
 Cost-Benefits and Individual Characters
• Individual characters have an effect on benefits and costs
• Individual rates of discount might be important (shortcuts)
• The gains from crime often occur immediately, whereas punishment
is something that might come in the future, and stretched over a long
period of time.
• A high discount rate will therefore tend to increase crime.
• The probability of punishment will be different for different people.
• Cleverness, differences in abilities of defending in court, or in
engaging good lawyers and the attitude towards risk
 Recidivism
• A high rate of recidivism is in accordance with the model of rational choice
• Recidivism - the tendency of individuals who have previously been
convicted and served a prison sentence to commit crimes again after their
release
• The degree of criminal activity will not tend to decrease after a conviction
for an offender if his/her preferences and opportunities available remain
same
• Serving time in jail may reduce legal opportunities, and convicts may
acquire human capital in illegal activities, so that recidivism is not
necessarily a result of erratic behavior or lack of self-control, nor is it
evidence of a lack of deterrence
• Rather, it may be consistent with a theory of rational choice
 Recidivism
• Committing a crime initially makes it more likely to continue criminal
activities after serving time in prison.
• Prison time can increase awareness of the risks and punishment
associated with crime, potentially deterring further criminal behavior.
• Educational programs in prison can equip individuals with skills that
reduce their inclination to return to criminal activities.
• Recidivism is influenced by a combination of factors, including an
individual's experiences and opportunities for personal growth during
incarceration.