Econ 360
Answers to Selected Questions
Problem Set 3

1.    Post-verdict bargaining.
a)  Defendant will make an offer of $20,000, which is equal to the expected value of the judgment [= (.5)(30,000)+(.5)(10,000)].
b)  A low harm plaintiff will accept the offer since going to trial will only result in $5000 (= $10,000-$5000).  A high harm plaintiff will reject the offer since going to trial will lead to $25,000 (= $30,000-$5000).
c)  For you to ponder.

2.  We did this one for homework.

3.  See your textbook.

4.  There are at least two types of additional costs that impose a welfare loss on society.  The precautionary costs induced by the threat of crime is one.  The other is the opportunity cost of the criminal's behavior--instead of engaging in merely redistributive activities, the criminal could be engaged in socially productive activities.

5. Rational crime.
a) This would increase the marginal benefits from crime and, as a result, lead to more crime.
b) This would raise the expected marginal costs of committing crime and, as a result, lead to less crime.
c) This would lower the expected marginal costs of committing crime and, as a result, lead to more crime.

6. Severity versus certainty.
Ignore this question.

7. Viewed purely from the perspective of efficiency, one could argue that indirect harms to society are greater when the President is murdered than when the average person is murdered. This results from the potential for considerably greater social disruption in the former case than would likely be associated with the latter. While it may be true that marginal social costs are uniformly higher in the former case as well, it is probably nonetheless true that marginal social benefits are considerably greater.

8. The important point to focus on here is the deterrent effect and its impact on the incentives faced by future potential criminals. The potential benefits from apprehending and punishing criminals in the current period include not only the increased security for people now but the potential future benefits of reductions in crime and corresponding reductions in the costs associated with apprehension, conviction and punishment of criminals in the future. The assumption is that, when society makes clear the potential costs if someone is convicted of a particular crime, rational people may be less likely to commit such crimes in the future. In addition, to the extent, that an individual is in jail, he is not committing additional crime that imposes additional costs on society in the current period (this is the incapacitation effect discussed in Chapter 12).

9. Is zero crime optimal from society's point-of-view? Why or why not?

10. Prostitution.
a) Externalities for one. Can you think of two types of externalities associated with prostitution?
b) Answers can vary but all should involve discussions of the relevant social costs that are trying to be minimized.

11. Rutgers library.
a) The original borrower will suffer foregone benefit of the book. Also, if returning the book on a later day would be more convenient, the original borrower will incur excessive costs to return the book.
b) If a original borrower forgets to return the book until $50 of fines have accrued, the patron has no incentive to return it until he or she needs a transcript. Rutger's policy lacks marginal deterrence once a fine of $50 has accrued.
c) Total social cost of punishments is the cost to offenders plus the cost or minus the gain to others. Fines produce a gain to the library that equals the cost to offenders, aside from collection costs, and so the social cost of fines is about zero, as befits a transfer payment. Holding a transcript is administratively more expensive for Rutgers. When a transcript is held, the original borrower suffers, Rutgers incurs an administrative expense and receives no benefit. Therefore, a fine is probably more efficient than the holding of transcripts.

12.
a) Use the model illustrated in Figure 11.5. In this case, there is a reduction in the marginal social costs of reducing crime. To the extent that criminals have less automatic weapons, the marginal costs of crime reduction are reduced (less chance of police getting injured or killed and less firepower needed to offset the criminal's firepower). As the MSC curve rotates down, the optimal percentage reduction in crime increases.
b) Use the model illustrated in Figure 11.7. This would cause the PPF for deterrence to shift out along the axis on which we are measuring certainty of punishment. The intercept of the severity of punishment axis would not change. Thus, the optimal mix would most likely change in favor of proportionately more reliance on certainty of punishment. The amount of deterrence that could be achieved would increase.
c) First, use the model illustrated in Figure 11.2. In this case, severity of punishment is increasing, causing the expected punishment curve to shift up and to the left. Thus, the economically rational quantity of crime decreases. Next, use the model illustrated in Figure 11.7. The changes in question would cause the PPF for deterrence to shift out along the axis on which we are measuring severity of punishment. The intercept of the certainty of punishment axis would not change. Thus, the optimal mix would most likely change in favor of proportionately more reliance on severity of punishment. The amount of deterrence that could be achieved would increase.

13. Marijuana legalization.
a) Against: If we assume that supply is relatively inelastic and demand is relatively elastic, efforts to reduce the supply of drugs will cause the per unit price to increase and the equilibrium quantity to decrease by a significant amount. Because we are assuming that demand is price elastic, as price rises, the net effect will be a reduction in the amount of money spent on illegal drugs and, assuming that drug use and crime are positively correlated, less crime. Assuming that drug use also results in negative externalities, including reduced worker productivity and a reduction in social well being, these external costs would also decrease.

For: Alternatively, if we assume that supply is relatively elastic and demand is relatively price inelastic, a reduction in efforts to reduce the supply of drugs will cause the per unit price to decrease and the equilibrium quantity to increase by a relatively small amount as supply increases. Because we have ass u med that demand is price inelastic, as price falls, the net effect will be a reduction in the amount of money spent on illegal drugs and, assuming that drug use and crime are positively correlated, less crime. However, assuming that drug use also results in negative externalities, including reduced worker productivity and a reduction in social well being, these external costs would increase (because the amount of drug abuse has increased).

b) There seems to be no end to the number of people who are willing to engage in the supply of illegal drugs. This suggests that supply is relatively elastic. In addition, drug abuse has remained fairly constant, in part because such drugs are addictive. Thus, at least for a portion of the population, demand is relatively price inelastic. This suggests that the argument in favor of legalization is more credible.

c) While the answer would appear to be relatively straight forward, there are two complications. First, external costs could increase, offsetting the other benefits of legalization. In addition, there is the question of the possible effect on non-addicts who might get hooked when they experiment with the non-legal drugs. I will be looking for consistency and completeness in your answers.