The Hidden Cost of Crime

Some crimes provide benefits that exceed their costs to society. If you must double park to make a crucial job interview, steal food to survive, or speed a dying person to the hospital, it may be best to commit the offense. More often, crime presents an externality problem because the burdens of crime are felt beyond—or external to—those causing them. Since criminals don’t bear the full cost of their behavior, they often commit crimes with larger costs than benefits.

Clarity on crime’s cost helps us prioritize crime-prevention efforts. It also helps individuals grapple with decisions as potential offenders. We face daily dilemmas about speed limits, drinking laws, piracy of copyrighted music and images, and other assorted temptations for mischief. To the extent that we care about the people around us, hidden consequences matter to our decision making.

Early crime-cost studies that focused on direct losses due to theft and vandalism misrepresented the extent of crime’s burden on society. The indirect costs have society reaching far deeper into its pocketbook. Even minor crimes such as spray painting on walls and shoplifting trigger large hidden costs. By creating an environment of fear and distrust, seemingly petty crimes erode property values and divert money to defensive expenditures. This includes the purchase of security cameras, alarms, fencing, lighting, gates, guards, theft insurance, protective firearms, locks, safes, and self-defense training.

Growing crime rates cause residents to spend time and money on neighborhood watch programs, and bring communities to invest in more police, replete with pricey police cruisers and equipment. And then there are the costs of the expansive criminal justice system and the prison system, where it costs as much to house an inmate as it does to send a student to college. Although this spending creates jobs, the same spending could have created jobs in schools, parks, and hospitals if it had not been spent in response to crime.

The total cost of crime eclipses the direct costs of theft and vandalism. In the United States we lose $3.5 trillion to crime each year, about the same amount we spend on all U.S. health care. That figure highlights the value of high moral standards.

More information

David A. Anderson (2012), “The Cost of Crime”, Foundations and Trends in Microeconomics: Vol. 7: No. 3, pp 209-265.

Why are there reflectors on my spin bike?

Economics can explain the bizarre. Consider the reflectors on this spin bike. It makes no sense to put reflectors on bikes destined to live indoors, does it?

In fact it does, if we reflect on the shapes of cost curves. A typical long-run average total cost curve slopes downward initially as an indication of economies of scale. That is, as a manufacturer increases the quantity of a particular product, the average cost of making it falls.

A company that makes road bikes and spin bikes has a choice. It can make smaller quantities of two types of pedals—those with and without reflectors—or it can make a larger quantity of pedals with reflectors and put that one type on both road bikes and spin bikes.

The firm enjoys economies of scale by making just one type of pedal, which makes sense because it only needs one design and one assembly line to make all of the pedals it needs. So, although you will never hit the streets on a one-wheeled spin bike, the reflectors on the pedals are helpful because they lower the price.

Why are so many car salespeople aggressive to a flaw?

The profession of car sales is among the least trusted in the United States. Some people put off replacing their cars for years because they dread setting foot in a dealership. If customers are dissuaded by aggressive salespeople, why do aggressive sellers persist? For insight, remember the prisoner’s dilemma story about dominant strategies leading to lose-lose situations.

In the context of car sales, consider a dealership with two sales people, each of whom must choose to be pushy or not. Suppose that if both salespeople are pushy, that will scare some people away and they will sell 4 cars per day—2 per salesperson. If  neither salesperson is pushy that will encourage shoppers to visit often and linger longer, leading to sales of 10 cars a day—5 per salesperson. And if one seller is pushy and the other is not, 7 sales are made and the pushy salesperson elbows out the non-pushy one and sells 6 of the 7 cars.

How does each seller see the options? If the other seller is not pushy, a pushy strategy sells 6 cars and a non-pushy strategy sells 5 cars; if the other seller is pushy, a pushy strategy sells 2 cars and a non-pushy strategy sells 1 car. So, given either strategy from the other seller, each seller sells more cars by being pushy . The outcome of this dominant strategy of pushiness is that each salesperson sells 2 cars. Sadly, despite the reasoning behind the pushiness, this outcome is worse for everyone involved than if no one were pushy! A pair of non-pushy salespeople would sell 5 cars apiece, and give each customer a less stressful buying experience. That would be a win-win-win, but it’s unlikely to happen.