drugs, prostitution, and the economics of black markets
DESCRIPTION
Drugs, Prostitution, and the Economics of Black Markets. Overview. Recap of Black Markets Drugs+Gangs Economics of Prostitution Economic Model. Drugs and Gangs. Invention of Crack Cocaine. •Technological advance – supply “shifter” •All other things equal •Lower equilibrium price. - PowerPoint PPT PresentationTRANSCRIPT
Drugs, Prostitution, and the Economics of
Black Markets
Overview
•Recap of Black Markets
•Drugs+Gangs
•Economics of Prostitution
•Economic Model
Drugs and Gangs
Invention of Crack Cocaine
•Technological advance – supply “shifter”
•All other things equal
•Lower equilibrium price
Conflicting Incentives: owner versus labor
•Owners seek to maximize profit
–Create stable and safe market environment
•Worker seeks to maximize pay
–Move up the rank -> higher pay
•Gang war
The Formation and Operation of a Regional Monopoly
•Monopoly distribution of crack cocaine in gang “turf”
•Downward sloping elastic demand curve
•Economic profit
Fixed and Variable Costs
•FC = Short-run costs
Bribes, Family Assistance, Weaponry
•VC = the productDrugs, Street
dealers, mercenaries
“Winner Take All”
•Common market structure (baseball players)
•Low Success, High Return
•Illegality drives competition
A Model for Labor
•Far right of origin•Workers taken
together require lower wages
•Represents low W*
CEOs of Gangs?
•Top 120 managers represented just 2.2%, > half the profit
•Investor reward of black market intact
Prostitution
History
• In the 1910s estimated to be 200,000 women prostitutes in US
• 1 of every 50 women in their twenties was a prostitute
• At the time a common prostitute working in Chicago would make $76,000 annually in today's money
• A prostitute working in an upscale brothel at the same time would make about $430,000 annually in today's terms
• Reported that one head of brothel accumulated as much as $22 million
Current Day
• Typical prostitute in Chicago works 13 hours a
week
• Performs 10 sexual acts per week
• Average hourly wage of $27, weekly pay of $350
• The wages of prostitutes have fallen dramatically over the last 100 years, why?
Supply and Demand
• Demand has noticeably fallen
Not for sex, but for paid sex
• Social trends involving sex have evolved greatly
• The arrest of many prostitutes has also caused a shift in supply, though not great
Elasticity
• The demand for prostitutes has shown to be rather inelastic
• Illustrated by two examples:o As prostitutes were arrested, supply dropped
which elevated the equilibrium price. Demand stayed the same as customers continued to pay the elevated wages
o Allie, a high end prostitute, consistently raised her prices but did not experience a decrease in demand for her services
Price Discrimination
•Prostitutes reported charging different rates based on skin color
•Named the price to African- American customers, allowed White customers to name the price
•Black customers pay on average $9 less per sexual act than White customers
Substitutes and Product Differentiation
• Prices at a certain location are the same from one prostitute to another
• Customers look at prostitutes as Perfect Substitutes that can be easily interchanged
• Firms, in this case brothels, can experiencing great benefits from providing slight different products
Incentives, Incentives, Incentives
• Like all markets, prostitution is ultimately driven by incentives.
• The bottom line is that the incentives provided by prostitution are enough to create a consistent amount of people willing to sell their bodies
• On the other hand, the incentives of paying for a prostitute continue to be enough to cultivate a demand for prostitution
Reducing Crime Rates
•Deterrent Effect: Increasing the potency or likelihood of negative consequences for a criminal
•Incapacitation Effect: Preventing a criminal from being able to perpetrate a crime
Sentence Enhancements
• Type of crime Deterrent
• Increased punishments that are added onto prison sentences that would have been served anyway
• Example:•Proposition 8 (1982) in California•10% reduction in eligible crimes after 1 year•After 3 years, had fallen roughly 20-40%
Sentence Enhancements cont.•Deterrent Effect vs. Incapacitation Effect•Threat of going to jail for a longer time vs. Being in jail for
a longer time
•Can often save government money
Levitt & Kessler’s Crime Model•Equations before introduction of Sentence
Enhancements•1. Maximization•(ri-ptJt(S))Cit
•2. Crime Level•Ct=1-(ptJt/R)-pt-1Ct-1
•Prison sentences in one period (t-1) are served in the following period (t)
Decoding
•r= Gain from committing a crime•p= probability of being caught•J= Utility loss from being jailed for a time period•S= Periods of time sentenced (initially 1 period)•C= Choice to commit a crime or not•If yes, C=1, if no, C=0
•R= distribution of ri for those who commit a crime•1/R is the density of crimes•t= current time period•i stands for the individual in the calculation
L&K’s Crime Model cont.•Equations After Introduction of Sentence
Enhancements•First Period
•Second Period
Differences
•Addition of variable d, the disutility of an additional period in prison
•Additional emphasis on pt-1Ct-1 : people arrested
from previous time period, pt-2Ct-2 : people
arrested from two periods ago
Conditions of Levitt and Kessler’s Model•Agents involved are assumed to live for infinite
time•Agents are assumed to be risk-neutral•Future Utilities are not discounted•Gains from crimes are kept, regardless of whether
caught