4 The Economics of Crime

Caroline Krafft

What is crime?

Before we can measure crime, understand its causes, or think about policy solutions to prevent and reduce crime, it is important to take a step back and ask a fundamental question: What is crime? In its simplest terms, a crime is an illegal act or action.

Since different countries, states, and even cities have different laws, what is considered a crime varies across localities. The definition of crime has also evolved over time. Context can often determine what is and is not legal. For example, in Maryland it is illegal to keep chickens (and other poultry) without registering the birds.[1] The law is motivated by both economic and public health concerns. Poultry is the state’s number one agricultural product. Backyard birds may be at risk in cases of disease outbreaks, as well as potentially spreading disease to commercial flocks.[2] In other contexts, for instance in Connecticut where poultry production is low, poultry registration is not mandated by law.[3]

Though the term “crime” is often used in moral and justice-based contexts, for example “a crime against humanity,” laws are not inherently moral or just. What is considered moral is often in the hands of lawmakers, and laws often embody the common attitudes of the times. In the United States, laws are typically passed by local, state, and federal legislatures by elected representatives. Thus, the attitudes, including the biases, of voters and policymakers, may become embedded in the law. Ideally, law and morality are one and the same. However, this has proven not to be true historically. Laws—and definitions of crimes—can be immoral or unjust. For example, historically in the state of Virginia, marriage between individuals of different races was illegal. Such laws are referred to as anti-miscegenation laws. Thus, the 1958 marriage of Mildred Jeter, an African-American woman, and Richard Loving, a white man, was a crime in the state of Virginia. The Lovings were indicted (charged) and sentenced for this crime. Ultimately, the Supreme Court struck down the law (and similar laws in other states) in the 1967 case Loving v. Virginia. The ruling was based on the principle of individuals having equal protection before the law, prohibiting discrimination based on race.[4]

A more recent example is the laws and punishments for different forms of cocaine. Crack cocaine is produced from powder cocaine, but the amount of crack cocaine that triggers eligibility for a mandatory minimum sentence is 1/100th the amount of powder cocaine. This disparity embodies racial biases, as the majority of individuals (more than 80%) of those convicted for crack cocaine offenses are African American, compared to a third of those convicted for powder cocaine and other drugs. Recent reform, in response to outcry around the bias in sentencing, has changed this ratio to a minimum sentence for crack cocaine at 1/20th the amount of powder cocaine. However, the law still embodies biases that disproportionately harm African-American communities.[5]

Criminal justice systems

The criminal justice system is the name for the agencies and actors who implement policies relating to crime.[6] While the structure of the criminal justice system varies from country to country, typically it has three main parts: (1) the police, who identify and apprehend those considered to be criminals, (2) the courts, who decide the guilt or innocence of those accused of crimes and sentence them, and (3) corrections institutions, such as prisons, that carry out the penalty determined by the courts. Different levels of government—local, state, or federal levels in the United States—have different, linked roles in the criminal justice system.

Although there are common elements to criminal justice systems throughout the world, countries take different approaches to how crime is addressed. The five basic approaches to controlling crime are: (1) retribution, (2) incapacitation, (3) prevention (4) rehabilitation and (5) restoration. Retribution seeks to punish individuals for their past crimes. Incapacitation tries to prevent future crimes by removing criminals from the community (historically by banishing, more recently by imprisoning). Prevention aims to prevent crimes by changing the costs, benefits, or opportunities of committing a crime. Rehabilitation is an approach focused on transforming an offender into a law-abiding, healthier, and more productive member of society. Restoration (restorative justice) focuses on crime as a form of injury to the victims, community, and offender and aims to repair the injuries and reconcile all parties.[7] Elements of these models are typically present in all criminal justice systems, but to varying degrees.

Figure 1[8] demonstrates the degree to which countries use imprisonment as a form of criminal justice. The United States has by far the largest number of individuals imprisoned, 2.1 million. It is important to note that the United States also has a large population, but even in terms of the rate of imprisonment (prisoners per thousand individuals), the United States has the highest rate of imprisonment of any major nation.[9]


Figure 4.1 Prison populations by country, in thousands

As well as debates about how to approach criminal justice—which are tied, in part, to debates around the causes of crime, discussed below—there are debates about the performance of the different models, and particularly critiques about disparities in who ends up in jail. Figure 2[10] presents information on the rate of imprisonment (per 100,000 people) by sex and race/ethnicity in the United States. Black men are almost six times as likely to be imprisoned as white men, and Hispanic men and men of other races are more than twice as likely to be imprisoned as white men. Although women are much less likely to be imprisoned in general, there are also substantial disparities among women in rates of imprisonment by race/ethnicity.


Figure 4.2. Rate of imprisonment (prisoners per 100,000 population), by sex and race/ethnicity

Why do these disparities in imprisonment occur? One reason may be that, for instance, men commit more crimes than women. However, individuals may also receive disparate and unfair treatment in the criminal justice system, as in the case of crack versus powder cocaine, depending on their identities. An important role for economists and statisticians in researching crime is identifying disparities in the criminal justice system, for instance racial profiling by police officers,[11] and designing policies to reduce those disparities.

Causes of crime

Why do people commit crimes? In order to understand how to effectively prevent and respond to crimes, we first need to understand the causes of crime. The typical way economists approach crime is to treat it as a rational, logical decision. Individuals weigh the benefits of crime versus the costs of crime. In general, comparing costs and benefits is referred to as cost-benefit analysis. When the benefits exceed the costs, individuals commit a crime. So, for example, an individual might decide to rob a bank by comparing the benefits of committing the crime, for instance receiving $10,000 in cash, to the costs of crime. The costs would depend on the chances or probability of getting caught and the consequences of getting caught—the punishment in terms of jail time or a fine. If an individual thinks they have a 10% chance of getting caught, and would expect to have to pay back twice what they stole ($20,000), then it would make rational sense to commit a crime; the benefits ($10,000) exceed the expected costs ($2,000=$20,000 for the cost*0.10 for the 10% chance).

One important cost to consider when assessing crime is the opportunity cost of potential criminals’ time. Engaging in illegal activities, such as growing marijuana, means forgoing alternative, legal uses of time, such as engaging in work. Since there are multiple alternative uses of an individual’s time, he or she will only choose to engage in crime when crime is more lucrative than all alternatives. An individual who owns a truck may choose to use it for the transportation of legal goods, to sell it, or to use it for the transportation of different illegal goods (e.g. guns, drugs, human trafficking). Their decision will be the alternative where the benefits, relative to the costs, are greatest. Opportunity costs are important in determining crime. Improvements in economic conditions, such as lower unemployment and higher wages, play an important role in reducing crime.[12] Changes in opportunity costs affect crime globally; in coastal countries, if fish catches are lower, individuals are more likely to engage in pirate attacks, because the alternative of fishing is less beneficial.[13]

Although economics typically treats criminal behavioral as a rational decision within an individual’s control, this approach may be more appropriate for some situations than others. Consider the cost-benefit analysis for tax evasion. How much money do I get to keep if I do not pay my taxes (benefit)? What are my chances of getting caught if I do not pay my taxes (part of the costs)? How much will the fine be if I do get caught (part of the costs)?[14] This analysis assumes individuals have enough information to assess costs and benefits. Do you know the fine for tax evasion or the chances of being caught?

The cost-benefit analysis model may also be problematic when considering crimes of passion, such as unpremeditated murder; it’s possible to consider this in an economic model where the emotional benefits of crimes of passion are extremely high, but psychological evidence doesn’t always align with this conceptualization.[15] While not a perfect model, cost-benefit analysis can help us think about ways to disincentivize crimes by reducing benefits or increasing costs.

Cost-benefit analysis leads to important conclusions about the underlying causes of crime, such as poverty, limited educational opportunities, unemployment, and social exclusion. These underlying social problems tend to reduce individuals’ opportunity costs of crime, by reducing the benefits of alternatives to crime. For example, if human trafficking pays $200 a day, a salesperson earning $58 a day is more likely to choose to engage in human trafficking than an economist earning $420 a day. Limited labor market opportunities, for instance low wages or high rates of unemployment, therefore can cause crime.[16] Low levels of education[17] can also contribute to crime, due to the role that human capital (education) plays in the opportunity costs, particularly the labor market alternatives, that individuals face.

Box 4.1: Why do people commit acts of terror?[18]

Economic analysis of crime can also be extended to understanding why people or groups may commit acts of terror. Economist Sarah Brockhoff and her colleagues have examined the link between domestic acts of terror and education. One perspective on the education and domestic terrorism relationship is that education reduces domestic terrorism by increasing economic and social opportunities and improving critical thinking (thus reducing the influence of propaganda). An alternative perspective is that education increases acts of terror by facilitating them, for instance facilitating the ability to organize an attack. The research demonstrates that the relationship between education and acts of terror depends on economic and political conditions. When individuals can translate their education into opportunities, they are less likely to commit acts of terror. However, when individuals cannot translate their education into opportunities, they are more likely to commit acts of terror.

Reducing Crime

A collective problem

Recognizing crime as a major social problem and with an understanding of the underlying causes of crime, how should societies fight crime? Before we can even answer this, we must answer an important underlying question: who should fight crime? Criminal justice systems are typically both funded and operated by the government—local, state, and national levels of police, courts, and prisons. Often, a private, free market is the optimal configuration for goods and services, where a government just sets the rules of the game. However, in some cases, typically referred to as market failures, the free market does not achieve the social optimum.

The private market will not achieve the optimal level of crime—or crime prevention—because crime prevention is a public good. Public goods can be contrasted with private goods. Private goods have two key features—that they are (1) excludable, which means that other individuals can be prevented from consuming the goods unless they pay for them and (2) rival, which means that the consumption of the good by one individual prevents the consumption of that good by someone else. One example of a private good is a cup of tea. The tea shop can prevent me or anyone else from getting that cup of tea unless we pay; tea is excludable. When I drink my cup of tea, this means that there’s none left for other people; tea is rival.

In contrast, public goods are non-excludable, meaning individuals cannot be prevented from enjoying the goods, and non-rival, meaning that one individual’s use does not prevent the use of another. National defense is a form of crime prevention (preventing invasion) that is non-excludable and non-rival. It is non-excludable because you cannot keep an individual within the borders of the country from enjoying the benefits, even if they do not pay for the service. It is non-rival because one individuals’ protection does not preclude the protection of others.

The nature of public goods leads to the free rider problem—that individuals can benefit from goods or services without paying for them; they can get a free ride. When such goods are privately provided, less than the socially optimal amount of the good will result. Consider your local street. It’s difficult to exclude individuals from a street; barriers could be set up so only those who pay enter (like a toll road), but this is costly, difficult, and slows down traffic. Unless traffic is terrible, one individual using the road does not prevent another from doing so. If you were asked to donate to pay for your local street, you might be tempted to chip in less than your fair share, based on your use, because other users will cover most of the costs—you can get away with still using the street without paying.

Due to their non-excludable and non-rival nature, public goods are, as their name suggests, typically paid for by the public, through taxes, and often publicly provided. National defense and other forms of crime prevention and criminal justice are public goods. This does not mean the private sector has no role in their provision. For national defense, the government typically contracts with private firms. Around $700 billion is spent in the United States on national defense each year. In 2010, $219 billion of that was spent in the form of defense contracting with private firms (not including the cost of civilian employees, military bases, or funding for wars in Iraq and Afghanistan).[19] Likewise, although the courts and police are typically public institutions, the corrections (prison) system is a mix of public agencies and private firms. Arguments in favor of private prisons focus on cost-savings generated by the private sector; however, the incentives of private prisons are likely to be problematic. Private prisons may lower the quality of their services (for instance violating human rights or shirking on rehabilitation) to minimize costs and thus maximize profits.[20]

Costs of crime

When thinking about the costs of crime to individuals or society, there are three types of costs that must be considered: direct costs, indirect costs, and intangible costs.[21] Whether something is a cost or a benefit can be confusing to consider; what is a cost to one party can be a benefit to another. While a criminal may benefit from a robbery, this is a cost to society. Direct costs are those that have a clear price. When an individual tags (vandalizes with spray paint) a grocery store, the direct costs to the business (and society) are the cost of a fresh coat of paint and the wages of the painter. The indirect costs are losses of economic value that do not have a clear price tag. In the case of tagging a grocery store, this might be a reduction in the house prices in the neighborhood, as a result of the perception that crime is a problem in the neighborhood. Intangible costs are the costs to victims of crime and society in terms of fear, pain, and suffering. Putting a price on indirect and especially intangible costs is challenging and requires substantial economic research.

As of 2018, in the United States there were 369 violent crimes per 100,000 people (a decrease of 3.9% from 2017) and 2,200 property crimes per 100,000 people (a decrease of 6.9% from 2017).[22] The cost of crime was estimated to be as high as 3.9 trillion dollars per year as of 2012.[23] Homicides (murders) are the most costly offenses, but drug crime and fraud are also a large share of the costs of crime. Globally, the cost of crime is high. For example, organized crime (mafia) in southern Italy is estimated to have an impact of a 16% reduction in GDP per capita.[24]

Cost-benefit analysis of reducing crime

Given the high costs of crime, and our understanding of the underlying causes of crime, the question now becomes how to reduce crime. Assessing the best approach requires applying a cost-benefit analysis. We need to determine the costs of crime-reduction programs and compare those costs to the benefits of the programs. It is important to note that the benefits of these programs would be measured in the reduced costs to society as a result of reduced crime.

When estimating the benefits of a program, it’s crucial to first estimate its impact. For example, does early childhood education reduce crime? By how much? These impacts then need to be assessed for their economic value, as there are likely to be direct and indirect benefits of programs (recall the terms direct and indirect costs discussed earlier). Programs such as early childhood education may in fact have a variety of benefits, as they can not only reduce crime, but they can also increase wages.[25]

Programs with benefits greater than their costs should be implemented. When we can only choose one option among many—since, for instance, one person with a drug addiction can only be sent to either (1) prison (2) in-patient drug treatment or (3) out-patient drug treatment—we should select the option where the ratio of benefits to cost (the cost-benefit ratio) is highest. The following sections assess different approaches to reducing crime.

Approaches to reducing crime


One simple approach to reducing crime is to legalize activities that are currently illegal. Clearly, this solution will only work for those crimes where the social costs of the crimes are low. The legalization of drugs, such as marijuana, is one area where cost-benefit analysis may be in favor of legalization as an alternative to prohibition of drugs. Prohibiting drugs leads to major costs not only in terms of enforcement but also in terms of violence, cartels, increased poisonings and overdoses, and increased property crime. Prohibition may have benefits if it reduces drug consumption, since drug consumption has negative health and social effects. Alternatives to prohibition include treating drugs the same way as alcohol or cigarettes (with taxation and regulation), or harm reduction (subsidizing treatment and providing, for instance, clean needles or substitute drugs).[26] In the U.S., a number of states have recently legalized marijuana. While it is early to assess the full economic consequences of these decisions, there have been at most small increases in marijuana use, coupled with substantial increases in tax revenue.[27]


It might seem ideal to prevent all crimes. However, the marginal costs of crime prevention increase as there are fewer and fewer crimes. Therefore, the goal of crime prevention should be only to reduce crimes to the point where the benefit equals the cost of additional crime prevention. Effective crime prevention programs tend to raise the costs of crime either through deterrence or increasing the opportunity costs of crime.[28]

Shifting the opportunity costs of crime occurs throughout the life course. Early childhood interventions that improve cognitive and non-cognitive skills tend to improve labor force outcomes and reduce crime. Programs targeted at children at high risk for poor early outcomes led to a 33%-40% decrease in arrests by age 19.[29] Such early childhood programs have a benefit-cost ratio in the range of 4-10 (between four and ten dollars of benefits for each dollar of costs).

Similarly, lead was removed from gasoline in the late 1970s and 1980s, reducing childhood lead exposure. A reduction in crime followed, starting in the 1990s. The social value of the crime reductions greatly exceeded the cost of removing lead from gasoline.[30] When youth are taught to consider costs and benefits more carefully, and their behaviors are changed to allow for conscious deliberation, it is possible to reduce crime.[31] When tested among economically disadvantaged youth in Chicago, the benefit-cost ratios of such training ranged from 5 up to more than 30. Although difficult to implement as a specific policy intervention, improving education and economic conditions can also achieve this end and prevent crime.[32] One specific policy intervention, however, may be de-concentrating poverty. When families were randomly given the opportunity to move from high-poverty to lower-poverty neighborhoods, it reduced violent crimes among teens.[33]

Deterrence approaches seek to prevent crime by raising the costs or the probability of getting caught. Something as simple as more light can reduce crime.[34] In the case of taxes, increasing the paper trail for tax enforcement has been shown to deter firms from committing tax fraud.[35] However, other corporate crime deterrence strategies tend to show only weak effects.[36] Increases in the probability of being arrested when committing a crime have been linked to decreased crime in New York City.[37] Sentencing laws can create deterrents; when gun crime sentences lengthened, gun crime saw a 5% reduction.[38] Deterrence, however, has mixed effectiveness. Scared Straight, a program designed to deter criminal behavior in youths, actually increases crime. The program involves visits to prisons by children identified as at risk for future crime. Rigorous evaluations of the program have demonstrated that those exposed to the program were more, not less, likely to subsequently commit crimes.[39]

What role do police tactics have in reducing crime? In general, highly targeted efforts to reduce crime are more effective than generalized increases in policing resources, such as an additional police officer.[40] Additional funds devoted to community-oriented policing, which involves building ties and trust with communities, can increase police legitimacy and reduce crime.[41] Intensive foot patrols in crime hotspots can reduce violent crime.[42] On the community side of policing, neighborhood watch programs can reduce crime, along with improvements in street lighting.[43] Closed Circuit Televisions (CCTV) can reduce crime but are most effective in targeted locations.[44] Body cameras on police officers themselves can reduce police misconduct.[45] While there are some effective strategies for policing, there have not been enough cost-benefit analyses to allow us to identify which ought to be priorities.


When crimes have been committed, should criminals be sent to prison? If so, for how long? One of the motivations for sentencing criminals to prison is deterrence, as discussed previously. An additional motivation for incarceration is to prevent a person from committing another crime, which is also called recidivism. Whether or how long individuals should be in prison is debatable. For juveniles, incarceration is by far the worst option; compared to administering no consequences, incarceration actually increases future crime. Juvenile incarceration is often ineffective. It reduces the chances of returning to school, which then reduces human capital and therefore the opportunity cost of crime. Diversion programs, including community service, are a more effective alternative than either juvenile incarceration or doing nothing.[46]

As for adults in prison, evidence demonstrates that continued incarceration does reduce crime, with the benefits approximately equal to the cost (on average).[47] This suggests that early release is not a universally optimal policy. Neither, however, is incarceration. In fact, there is no universally optimal policy. Each type of offender requires a different approach. For example, incarceration is an effective strategy for high-risk offenders, but not for less prolific offenders or for drug offenses.[48] In addition to ineffectiveness in terms of crime reduction, incarceration as the default response to all offenders is costly. Incarceration costs $30,619.85 per year for federal prisoners as of 2014 in the U.S.[49] Other strategies are more cost-effective, such as diversion to drug treatment. Alternatively, early release combined with the threat of a longer sentence for reoffending can reduce the risk of recidivism.[50] Intensive monitoring, however, for example by probation officers, is not cost-effective and may actually increase recidivism. Reducing the intensity of supervision is thus cost-effective.[51]


Rehabilitation is an important aspect of preventing crimes. Measures toward rehabilitation can be taken either in place of incarceration, while a person is in jail, or after they’ve been released. Drug courts, which incorporate drug treatment and monitoring into the criminal justice process, reduce recidivism, more so for adults than juveniles.[52] Rehabilitation generally has positive effects, and is more effective than punitive measures in reducing recidivism. Rehabilitation can include elements of therapy or counseling. It can also take the form of educational and vocational programs that seek to shift a person’s options, and thus cost-benefit analysis, away from reoffending.[53]

Providing economic opportunities to those at risk of recidivism can shift the cost-benefit calculation away from reoffending. In Liberia, unemployed ex-fighters engaged in illegal activities are at high risk for returning to violence or crime, such as engaging in mercenary work. A recent economics experiment provided a combination of capital, the promise of future cash, agricultural training, and counseling for these high-risk men. Training alone did not have a significant impact, but current capital and future cash led to improved legal employment activities and, therefore, less illegal work and mercenary activity.[54] The effectiveness of these economic opportunity programs, however, depends on the context in which they’re implemented. In the U.S., for example, ex-offender employment programs have not had a significant effect on recidivism.[55]

Restorative justice

Restorative justice programs bring together offenders, victims, and communities to determine how the offender can repair the injuries they’ve wrought. While such programs cause only modest reductions in reoffending, they are cost-effective, with a benefit-cost ratio of eight. Such programs also compare favorably to traditional criminal justice prosecution.[56] Although restorative justice is an option only in cases when appropriate and ethical, it is particularly appealing as a lower-cost option to normal criminal justice processes and leads to higher victim satisfaction.

Summary and conclusions

Crimes are defined by the local legal codes. While laws may embody ideals of justice and morality, they can also embody the biases of voters and policymakers and even contribute to social problems. Crimes have the potential to impose enormous direct, indirect, and intangible costs on society. To try to reduce those costs, countries use a variety of different approaches within their criminal justice systems. Criminal justice systems are primarily public, because crime prevention is a public good. Since individuals typically decide to commit crimes when the benefits outweigh the costs, policies to reduce crime often target raising the costs of crime, including the opportunity costs. This may take the form of improving labor market alternatives.

The cost-benefit analysis framework can be applied to evaluating approaches to crime reduction, including legalization, prevention, incarceration, rehabilitation, or restorative justice. Which option is best is dependent on the relative costs and benefits, as well as the type of crime. While incarceration may be effective for high-risk offenders, preventing crime through better early childhood experiences is more cost-effective. For juveniles, incarceration is the worst option. Doing nothing is an even better option, although diversion is best. Drug treatment and other forms of rehabilitation, as well as restorative justice, also tend to be cost-effective. Ultimately, countries are likely to choose a mix of these policies in response to the unique range of criminal justice challenges they face.


List of terms

  • Crime
  • Criminal justice system
  • Retribution
  • Incapacitation
  • Deterrence
  • Rehabilitation
  • Restoration
  • Cost-benefit analysis
  • Market failures
  • Public good
  • Private good
  • Excludable
  • Rival
  • Free rider problem
  • Direct costs
  • Indirect costs
  • Intangible costs
  • Cost-benefit ratio
  • Recidivism



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