1. Criminal Law The difference between criminal and civil Theory of optimal punishment –How do we decide how many criminals to catch –And what to do to them? Why benefits to criminals count Should the rich pay higher fines? The inefficiency of efficient punishment –Why not replace all jail sentences –With probabilistic execution? –Same deterrence, no need for expensive prisons

2. Criminal Law vs Civil Law All crimes are crimes against the state –If someone mugs me, I’m just a witness –The state of California is the victim, legally speaking –And the state decides whether to prosecute, controls prosecution, settles, collects any fine Torts are offenses against the real victim –Who decides whether to sue –Prosecutes, settles if he wants –And collects damages The discussion of why is another chapter

3. What’s wrong with theft? Someone picks my pocket –He is $100 better off –I am $100 worse off –We judge outcomes by summed benefits –So what’s the problem? Suppose picking pockets “earns” on net $10/hr, alternative work $5/hr –People shift into the more attractive profession –Driving down its return –Until the marginal pickpocket gives up a $5/hr job to make $5.01 picking pockets –I still lose $100, but he makes about zero There will be inframarginal pickpockets –Especially good at picking pockets or especially bad at doing anything else –Who do somewhat better than that But there are also additional costs –To protect myself I keep most of my money in my shoe--and get a sore foot –Or spend all my time watching out for pickpockets The argument generalizes

4. Rent Seeking Kruger ’ s example –Exchange controls and exchange permits –Competition to get valuable permits competes away their value Homesteading example--already discussed Rent seeking and litigation –A legal procedure, such as a tort suit, to transfer costs, sets off rent seeking –Justified only if there is some indirect benefit, such as … –Deterrence. –Hence “ let the cost lie where it falls ” makes sense in many cases.

5. Efficient and inefficient offenses Terminology –Murder is a crime, burglary is a crime –A particular murder or burglary is an offense Most offenses benefit the criminal less than they harm the victim –If your car was worth more to me than to you –I wouldn’t have to steal it--I could buy it And the opportunity for me to steal from you –Gives me an incentive to spend time and effort stealing –You to spend time and effort defending –All of which is a net loss So most offenses are inefficient, better if they do not occur

6. But … Consider –The speeder with his wife giving birth in the back seat –The lost hunter breaking into an empty cabin –These are efficient offenses: Benefit>damage done –We want a legal system that permits these, but deters offenses that are inefficient In considering how to do it, I will assume –The only purpose of punishment is to deter One could make the analysis more complicated By allowing for incapacitation--being in prison or dead limits your ability to commit more crimes And rehabilitation, if you think punishment can be used to change people in ways that make them less likely to commit future crimes –But not today –And I will also assume rationality, as usual

7. Optimal Punishment How do we deter all and only inefficient offenses? Special case efficient offenses? –Traffic cop looks in back seat, waves you ahead –Hunter gets off under the doctrine of necessity –But what if the court can ’ t tell if the offense is efficient? –Speeding to get to a very important meeting Criminal punishment as a Pigouvian tax –We punish with some probability p of having to pay a fine F –Set pF = damage done This assumes risk neutral criminal for simplicity To generalize, set certainty equivalent equal to damage done –Crime is then only committed if value to criminal>damage Does that explain why we don ’ t deter all murders?

8. What I have left out I have left out the cost of catching and punishing criminals –Deterring an offense isn ’ t worth doing –If it costs more than the net damage the offense does Consider an offense that –Costs the victim $1000 –Benefits the criminal by $900 –For a net loss of $100 We can deter it by either by –Having more police, making it more likely the criminal is caught –Or punishing it more severely, or both –But police and punishment are costly –If the extra cost is $200, deterring it makes us worse off! How do the costs depend on probability and punishment? And how do we include them in our calculation?

9. Taking account of costs We deter offenses by some probability p of punishment P The cost of probability p: Enforcement cost Cost of Police, courts, etc. Costs more to catch more offenders Also, we could convict more criminals if we lowered our standards of proof At the cost of convicting more people who are innocent The cost of punishment P--punishment cost –Cost to criminal of being punished--costs to criminals count too –Plus the cost to us of punishing him –For example: A Fine: we get what the criminal loses –Net cost zero –Not counting administrative costs of collecting the fine Imprisonment –Criminal loses a year of freedom –We must pay for a year of imprisonment –Net cost > amount of punishment. Execution: –Criminal loses a life, we don ’ t get one –Net cost is one life, equal to the amount of punishment

10. From Production Function to Total Cost Curve Step 1: Find the efficient punishment/probability combination. –Out of all pairs p,P that are equivalent to the criminal –And so give the same level of deterrence –Find the one with the lowest enforcement+punishment cost –Think of that as the cost of imposing expected punishment – = pF for a risk neutral criminal paying a fine –More complicated in the general case –So we now know the minimum cost of any level of deterrence We have just derived the total cost curve for deterrence from the production function. –p and P are the (costly) inputs, deterrence the output –We are finding the least costly input bundle for each level of output

11. Find the optimal expected punishment Buy the level of deterrence at which marginal cost of deterrence equals the benefit of deterring the marginal offense. –More than that would deter some crimes not worth the cost of deterring –Less would fail to deter some crimes that are worth the cost of deterring Benefit of marginal offense to offender equals –Because he commits only offenses worth more than that –So the one that he would commit if punishment was a little less has benefit=expected punishment Benefit of deterring is (damage done) - (benefit to criminal) = D - Set that equal to marginal cost of deterrence: D- =MC So =D-MC Optimal = damage done by one offense - cost of deterring one more offense. Note that MC might be negative –Raising increases the cost per offense –But reduces the number of offenses –If he is deterred, you don’t have to catch him and punish him

12. Implication For crimes that are hard to deter –Increasing expected punishment a lot Only decreases number of offenses a little Which increases the enforcement cost/offense So cost increases, so MC of deterrence >0 –So the expected punishment should be less than damage done We let some inefficient crimes happen Because deterring them costs more than it is worth Murder, for instance For crimes that are easy to deter –Increasing a little decreases offenses a lot –So cost decreases, so MC of deterrence is negative –So should be more than damage done –Deter all inefficient crimes and some mildly efficient ones –To save the cost of apprehending and punishing them

13. “Efficient offense” has two senses By committing the offense, does the criminal make us, on net, better or worse off? –If benefit to the criminal<cost to the victim –The offense is inefficient By deterring the offense, does the legal system make us on net better or worse off? –The criminal can simply choose not to commit the offense –We can prevent the offense only with more enforcement, which may be costly –So it may be inefficient to deter an offense –Even though it does net damage –And efficient to deter an offense that does net good!

14. Stigma as Punishment –After conviction for embezzling, hard to get a job as a corporate treasurer Suppose you apply, offer to take a cut in pay? The fact that you can’t make an offer that will be accepted Is evidence that your gain from the job is less than their loss –Which means that the stigma helps them more than it hurts you –Which makes stigma the one punishment with negative punishment cost

15. Why Benefits to Criminals Count In all our calculations, gains and losses to criminals –Count just like gains and losses to other people –Why not ignore them, since criminals are bad people? One reason is it leads to a circular argument –Thieves are bad, so their gains don't count –So theft is inefficient –Which explains why thieves are bad –We are trying to figure out what the law should be, not start knowing the answer from our moral beliefs Another is that we want to generate a theory –Sufficiently general to answer questions we don't know the answer to –And lots of what we want to know our moral intuition doesn't give us Finally, if we can derive results that fit our moral intuition –Without first assuming anything more than a goal of efficiency –That might tell us something interesting about our moral intuition

16. Should the Rich Pay Higher Fines? A $100 speeding ticket is nothing to Bill Gates –Intuition: scale it up to get deterrence –Economics, first pass: If his gain from speeding is more than our loss Then it is efficient to let him speed And since he pays the damage, we have no net loss--not an issue of transfers between rich and poor Economics, second pass –This assumes the Pigouvian world of zero enforcement cost, punishment=damage –We have just seen that optimal punishment also depends in part on how much it deters –And Gates has a different supply curve for offenses than I do –So a different optimal level of punishment

17. Intuition vs Economics Two kinds of offenses –Payoff in utility Time saved by speeding Satisfaction of slugging a guy you don’t like –Payoff in money Supply curve for rich vs poor –If the payoff is in money The same fine should deter rich and poor The dollars of payoff are worth less to the rich too –If the payoff is in utility, it takes a higher fine to deter the richer offender The intuition is half right –Sometimes the optimal fine is higher for the rich –Because it takes a higher fine to deter –Sometimes it is lower, because –Deterring the rich criminal costs more than it is worth

18. Why not hang them all? Suppose a crime is punished with 10 years in jail –Careful research establishes that the criminals –Are indifferent between that and 1/6 of an execution –So we can get the same deterrence at lower cost Convict, roll a die, 1-5 turn him loose 6 hang him –Clearly an improvement Criminals, ex ante, are no worse off Same deterrence, so victims no worse off And we no longer have to pay for prisons I'll ignore incapacitation, which makes the argument more complicated –To save even more Fire enough cops, raise standard of proof, to lower p by a factor of six And hang everyone we convict More generally, we should never use a punishment if –There is some higher punishment with lower cost/deterrence –Since applying the higher punishment with lower probability –Costs less in enforcement and punishment costs

19. For example Squeeze out money, since fines are an efficient punishment –You can lower probability of execution by –Paying a fine –The more pay, the less likely you are to be executed Then labor if it produces net income –5 years or $50,000. You can stay in prison 5 years –Or accept an offer from a private prison –You work, they pay your fine in less than five years Or execute, with organs forfeiting for transplant Or, if none of these produces positive return –Either use execution or, if we want smaller punishments –Flogging and the like Why don't we do it this way? Should we?

20. Rent seeking The problem –If we want law enforced, enforcers must gain –But a way in which I gain at your expense –Is an invitation to rent seeking –I get you convicted, not because you did something wrong But because I can profit by convicting you Which means both of us spend resources Me framing you, you defending yourself Examples –Mencken story –Niven story –Punitive damages –Civil forfeiture

21. Why we don't eat each other Burying dead people instead of cooking them –Is a waste of good protein –Which is scarce in lots of societies –Yet routine cannibalism is very rare, if it exists at all –See The Man Eating Myth for evidence against –Why? The more the gain to killing someone –The greater the rent seeking costs –"Watch out, there's someone behind you with a knife" Consider the application to organ transplants –The obvious solution to the shortage is a free market –But how do you make sure the organs were donated?

22. Quick Review Criminal Law vs Civil Law: –Why do we have both? –What are the differences? Why? What's wrong with theft anyway? –Stealing what you wouldn't buy is inefficient (explain) –And the opportunity to steal attracts resources: Rent seeking – so the marginal theft has no gain to balance victim's loss –To first approximation, net cost of theft=amount stolen Less than that because some thefts are inframarginal More than that because victim bears costs of defending his stuff

23. Permitting Efficient Crimes Efficient offenses Sense 1: Benefit>cost –We want them –Can get them by special casing: Defense of necessity. If their efficiency externally observable –Or by a penalty that won't deter them First approximation: Punishment=damage done –Probability of being caught and convicted x fines –= damage your offense does –So you only do it if it's worth doing But this ignores the cost of deterrence –It is costly to catch criminals –And to punish them –And only worth doing if the deterrence is worth its price

24. Second Approximation How much must we increase total cost –of enforcement and punishment –To deter one more offense –If it's more than the net damage done, don't But increasing deterrence sometimes reduces cost –Because you don't have to catch and punish –Offenses that don't happen--because you deterred them –So it may be worth deterring some efficient offenses –To save the cost of prosecuting them. So we want average punishment (pF) –<damage done for hard to deter crimes –>damage done for easily deterred crimes –Think it through and see if it makes sense

25. Other Points Stigma may be a punishment with negative cost –Knowing you are a criminal helps me –More than it hurts you –So the knowledge both punishes and produces net benefit We count costs and benefits to criminals too –Cost of execution includes the life lost –Cost of a crime is net of the benefit to the criminal Which seems very odd, but makes sense –If we are starting without morals and justice –And trying to deduce them, or something similar –From economic efficiency

26. The Efficiency of Inefficient Punishments Suppose you aimed for the least costly punishments –Fines wherever possible –Penal slavery if the defendant can't pay –Or execution with organs forfeiting for transplant –Wouldn't that get deterrence at a lower cost? Yes--if you trust the enforcers –Easy ways of hurting people –Or expropriating their property –Or their organs –Are a temptation to abuse –Again rent seeking How can we prevent abuse of the enforcement system?