1-29-31Lecture Econ 327

1-29-31Lecture Econ 327 - The Demand for Leisure A. The...

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Unformatted text preview: The Demand for Leisure A. The Determinants of Demand 1. The opportunity cost of the good. 2. One's level of wealth. 3. One's set of preferences. D = f( C, W) D = demand C = opportunity cost (-) W = wealth (+) The opportunity cost of leisure is the wage rate. =f is determined by preferences D = f(W, Y) D = demand for leisure W = wages (-) Y = income (+) 1 QS = f((Gains) (material costs + opportunity cost of time + expected value of punishment)) $ S QS1 Q 2 Simultaneous Determination of Optimal Allocation: Mul/Tl = Mui/Ti MBl/MCl = MBi/MCi . 3 Shifts in the Individual Supply Curve: Change in Level of Community Wealth Change in Attitudes/ Preferences Change in Wage Rate $ S'' S S' p Q 4 Producer Choice Theory Short-run Production Q TP L 5 Total Product: Total output of a given quantity of input. Marginal Product: The change in production (output) due to a one-unit increase in an input. Diminishing Marginal Returns: A situation where the increase in output due to a one-unit increase in an input declines. 6 Production and Cost Functions MP = Change in Q/Change in L Marginal Cost: Change in total cost due to a one-unit increase in production MC= W/MP MC P 7 q* q Shifts of the Marginal Cost Curve: Change in the MP Change in the price of the input 8 P MC' MC q 9 Market Supply of Crime: Sum, horizontally, all individual supply curves 10 The Market for Crime: Isaac Ehrlich 1. All actors (offenders, potential victims, buyers of illegal goods and services, and law enforcement authorities) behave in a rational manner; act to optimize their own well-being. 2. All actors generally form expectations about relative legitimate and illegitimate opportunities, including the expected costs of the illegitimate, based on available information, so that subjective expectations and objective opportunities may be linked. 3. There is a stable distribution of preferences for crime, as well as safety from crime, in the population at large. 4. Since crime is a negative externality, and public law enforcement is a non-exclusionary public good, the objective of law enforcement is to maximize total welfare. 5. The `crime market' can attain an equilibrium--through the actions of offenders, law enforcement, potential victims, buyers and sellers of stolen goods 11 "Herein lies the first lesson to be derived from the economic approach to crime: even if individual supply-of-offenses functions were completely inelastic with respect to variations in net returns above their critical threshold levels, so that active offenders would not react to either positive or negative incentives above these levels, it is still true that the market supply curve would be generally elastic. This is because changes in the actual net return from crime would make [that return] exceed or fall below the threshold level of marginal offenders, thus inducing [them] to enter into or exit from criminal activity.." Ehrlich, p.47 12 Perfectly Inelastic Labor Supply S $ S $ $' $' 2 Q/t 3 Q/t Individual 1 $'= Critical threshold level Individual 2 13 S $ Q S SS = Supply of Offenses Schedule 14 The Demand Side I. Private Protection Individuals desire protection from crime Protection from crime costs money --Security equipment --Insurance --Move to a safer neighborhood --Hire security personnel Optimal Level of Protection: MC= Cost of all protection MB= Value of crime avoided 15 S $ d p d q S Q/t SS = Supply of Offenses Schedule dd = Derived Demand-for-Offenses Schedule (Crime rate that is tolerated by society as an indirect consequence of what they are willing to spend for protection.) 16 Changes in Demand Change in tastes Change in income Change in prices of related goods $ S D D' Q/t 17 S $ D' T d d T D' Q/t S SS = Supply of Offenses Schedule dd = Derived Demand-for-Offenses Schedule dd-D'D' = optimal expected punishment--public `tax' on crime 18 Exogenous Factors that May Impact Supply Expanding Economy Recession Change in Government Expenditures S' Change in Attitudes $ S Q/t 19 "The successful removal of incarcerated or rehabilitated offenders from the illegitimate market causes a leftward shift in the supply of offenses schedule, but the effect on the equilibrium volume of offenses is now inversely related to the elasticity of the aggregate supply curve. The reason is that "removed" offenders can be replaced by either new entrants or an intensified illegal activity on the part of active offenders." Ehrlich, p.57 20 Incapacitation $ S' S Inelastic Supply D Q/t 21 Incapacitation $ S' S Elastic Supply Se' Se D Q/t 22 Optimal Punishments: Negative incentives: Deter and otherwise prevent would be and actual offenders from committing an offense. --the probability and severity of punishment --the type of punishment to be imposed p = .6 P = 5 years Y = $30,000/yr. Expected cost of punishment = p(P*Y) = .6(5*$30,000) = $90,000 p = .8 P = 5 years Y = $30,000/yr. Expected cost of punishment = p (P*Y) = .8 (5*$30,000) = $120,000 Positive Incentives: Induce participation in legitimate alternatives 23 The economic theory of criminal behavior suggests that the amount of crime can be reduced through programs to increase the certainty and/or severity of punishments and through programs to change economic conditions to increase the relative returns to legitimate activity. 24 Punishment Imprisonment--extremely costly form of punishment: Resources used to guard and supervise Building and maintenance of prisons Prisoners' time. Benefit: incapacitation and deterrence Fines--impose a cost on those punished which provides benefits to others. Benefit: transferred cost and deterrence. Net cost to society is a transfer cost. 25 The social cost of using fines is much less than the cost of imprisonment--few additional costs are imposed on the rest of society. "Fines provide compensation to victims, and optimal fines at the margin fully compensate victims and restore the status quo ante, so that they are no worse off than if offenses are not committed. Not only do other punishments fail to compensate, but they also require `victims' to spend additional resources in carrying out the punishment." Becker, Crime and Punishment: An Economic Approach" JPE, 1968. 26 In addition to a deterrence effect, imprisonment produces a reduction in the amount of crime. That is the effect of incapacitation--although they do have a deterrence effect fines produce no incapacitation effects. If an offender is highly active or dangerous the positive effect of fines will be more than offset by the impact of no incapacitation. 27 The Case Against Fines: ines allow offenses to be bought for a price--hence they are immoral. ines are unfair to individuals with relatively low incomes. The burden f any given fine is related to the size of one's income or wealth--if hose who are unable to pay the fine are imprisoned, a system of fines ould result in a greater proportion of low-income individuals being mprisoned. Fix the fine as a proportion of the offender's income 28 Put a reasonable monetary equivalent on the time served currently too low) Crime Victim Restitution Programs Eligibility requirements Claimants Compensable costs 29 Limitations of the Model Deterrence Incapacitative programs should have a deterrent effect, however, the size of the effect will be determined by the elasticity of supply. Repeat Offenders Incapacitation and imprisonment with no rehabilitative training could increase the probability of recidivism by released offenders because of the informal training they receive from 30 associating with other convicts. What is the purpose of punishment? 31 What is the purpose of punishment? Incapacitation Deterrence Rehabilitation Retribution 32 Crime Shock S $ d S' d q q' S Q/t 33 Crime Shock Response S $ d' d S' d d' q q' S S' 34 Q/t The Three Strikes Laws Category of statutes enacted by state governments in the US, beginning in the 1990s, to mandate long periods of imprisonment for persons convicted of a felony on three (or more) separate occasions. The underlying philosophy of theses laws is that any person who commits more than two felonies can justifiably be considered chronically criminal, and that permanent imprisonment is then mandated to protect society. 35 Mandatory Minimum Sentences (Federal Sentencing System) The purpose of mandatory minimums was to prevent the judicial trivialization of serious drug crimes. Prior to the establishment of mandatory minimums federal judges had complete discretion in sentencing. Sentences varied widely. There are two levels of mandatory minimums in the federal system, with each level doubling for defendants with prior convictions: 36 Unintended Consequences: The prison population increased by more than 1 M between 1980 and 2000 The number of state prison facilities increased from 600 in the mid-70s to over 1000 by the year 2000. The Census Bureau counts prisoners as living where they are incarcerated at the time of the census--the location of prisons therefore has profound implications for state and federal funding allocations as well as political representation. Disenfranchisement of a large share of the population--falling disproportionately upon black men. (First appeared during reconstruction). 37 "The relative desirability of specific means of crime control cannot be determined just by their relative efficacy; it also depends on their relative social costs and on the welfare criteria invoked as a justification for public law enforcement." Ehrlich, p.63 Maximize Social Welfare $ CS PS MB Q 38 MC More Equally Distribute Welfare Since the joint probabilities of apprehension and conviction are substantially less than 1, penalties are applied in a `lottery' system--offenders pay not just for their own offenses, but for those who get away: --Explains numerous safeguards to protect the rights of the accused --Explains why opposition to capital punishment increases when the penalty is applied capriciously. At the margin it is better to trade severity of punishment, then, for increases in the probabilities of apprehension and conviction-more equal distribution 39 "The deterrence hypothesis and its logical extension-- the market model--rely on the marginal efficacy of both positive and negative incentives and on the interaction of market demand and supply forces, to explain the observed variability in the frequency of offenses across space and time.. The empirical evidence is consistent with the hypothesis that punishment and other general incentives exert a deterrent effect upon offenders." Ehrlich, p. 65. 40 ...
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This note was uploaded on 04/02/2008 for the course ECON 327 taught by Professor Malone during the Winter '08 term at University of Michigan.

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