Ch33 - Chapter Thirty-Three Law and Economics Effects of...

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Unformatted text preview: Chapter Thirty-Three Law and Economics Effects of Laws Property right assignments affect asset, income and wealth distributions; e.g. nationalized vs. privately owned industry. Effects of Laws Property right assignments affect asset, income and wealth distributions; e.g. nationalized vs. privately owned industry. resource allocations; e.g. the tragedy of the commons e.g. patents encourage research. Effects of Laws Punishments affect incentives for illegal behavior; e.g. high speeding fines can reduce the amount of speeding. Effects of Laws Punishments affect incentives for illegal behavior; e.g. high speeding fines can reduce the amount of speeding. asset, income and wealth distributions; e.g. jail time results in lost income. Crime and Punishment x is the quantity of an illegal activity produced by an individual. C(x) is the production cost. B(x) is the benefit. Gain is B(x) - C(x). What is the rational choice of x? Crime and Punishment x max B x C x ( ) ( ).- First-order condition is = B x C x ( ) ( ). Notice that marginal costs matter more than do total costs. Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC x x * Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC x x * C(x), higher, but same MC No change to illegal activity level. Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC x x * Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC C(x), high MC x x * Higher marginal costs deter crime. Crime and Punishment Detection of a criminal is uncertain. e is police effort. (e) is detection probability; (e) = 0 if e = 0 (e) as e . Crime and Punishment Given e, the criminals problem is x max B x e C x ( ) ( ) ( ).- Crime and Punishment Given e, the criminals problem is First-order condition is x max B x e C x ( ) ( ) ( ).- = B x e C x ( ) ( ) ( ). Crime and Punishment Given e, the criminals problem is First-order condition is Low e low (e) low marg. cost. High e high (e) high marg. cost. x max B x e C x ( ) ( ) ( ).- = B x e C x ( ) ( ) ( ). Crime and Punishment = B x e C x ( ) ( ) ( ) B(x) x x * Higher police effort deters crime. MC = ( ) ( ) e C x h MC = ( ) ( ) e C x l e e l h < Crime and Punishment Higher fines and larger police effort both raise marginal production costs of illegal activity. Which is better for society -- higher fines, or more police effort? Crime and Punishment Higher fines and larger police effort both raise marginal production costs of illegal activity....
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This note was uploaded on 01/06/2012 for the course ECON 102 taught by Professor Goodhart during the Spring '11 term at Abu Dhabi University.

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Ch33 - Chapter Thirty-Three Law and Economics Effects of...

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