Economic effects of crime

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Crime imposes huge economic effects on European societies. These economic effects of crime are, in essence, a category of economic impact.

Description

Crime not only leads to material and immaterial costs for those who have become victimised, but crime also forces local and national authorities to spend billions on the prevention of crime and the detection, prosecution and punishment of criminals. For the Netherlands, for example, the costs of crime are estimated to be 20.2 billion euro in 2005[1], approximately 4.1 percent of the GDP. The British Home office researchers Brand and Price (2000)[2] estimate the costs of crime to be between £35 and £60 billion per year for England and Wales.

The identification and the estimation of the costs of crime have received broad attention in economic literature and research, but the economic effect(s) and impact of crime on society is still an underexposed field of interest. One important reason of this lack of studies is that it is very difficult to quantify the costs of crime with the help of economic tools, and especially the benefits since they are in most of the cases non-economic, e.g. health benefits, the benefits of living in a safe area, etc. Moreover, while economic analysis (such as social cost-benefit analysis) is common in many contexts, the results depend largely on the used methodologies, including the underlying assumptions and measured effects.[3]. Nevertheless, the fact remains that there is an economic impact related to crime (in both a direct and indirect way).

Crime is a major part of every urban society, but it is not always as relevant for urban planners (e.g. cyber crime). In order to help the urban planner decide when the costs of crime should be considered, the Securipedia pages on urban objects do not just address the economic function of urban objects, but also the economic dimension of the more specific security threats.

Types of costs and economic effects of crime

Economists use various definitions and terminology for categorising the economic impact of crime. The two main categories (used in Securipedia) are the primary and secondary economic impact of crime, also referred to as direct and indirect economic effects[4].

This relationship is illustrated below in the clickable map:

CrimePrimary economic impactSecondary economic impactEconomic impactEconomic impact crime v2.jpg
About this image

Primary economic impact of crime

In general, economists use two types of methods to further categorise the (primary) costs of crime[2]. The first way is by defining the subject who bears the effects (victims, potential victims, society etc.). From an economic point of view, criminal offences can be aimed against:

  • individuals/households
  • the commercial sector/companies[5]
  • the public sector/society

A second approach of categorising, is by breaking down the costs in relation to individual incidents (Davidson, 1999[6]). This way, the costs of crime are categorised as:

  1. in anticipation of crime: mainly costs of precaution measures to avoid crime such as locks, alarm prevention programs and surveillance.
  2. as a consequence of crime: for instance, loss of property, medical and health care costs, victim support etc.
  3. in response to crime: costs considering police, prosecution, court proceedings, sanctions etc.

Secondary economic impact of crime

Crime not only leads to financial or physical damage and prevention costs, but also indirectly influences the local/regional and national economy of a country (the so-called secondary economic impact). According to Detotto and Otranto (2010)[7],“crime acts like a tax on the entire economy: it discourages domestic and foreign direct investments[8]. On a macro-economic level crime influences:
Graffiti
  • economic growth;
  • income;
  • labour force participation;
  • income spent on security measures; and
  • reallocation of resources creating uncertainty and inefficiency.

On a more local and regional level, economists define the following types of impact:

  • business impact (crime reduces competitiveness of companies and investments)
  • tourism impact
  • impact on quality of life/social capital
  • impact on property value

According to Tita, Petras and Greenbaum (2006)[9] “crime serves as an important catalyst for change in the socio-economic composition of communities. The effect crime has on the local property value is one of those catalyst effects. The question whether crime rates affect housing prices has been a popular subject of research over the last decades. However, although most empirical studies confirm that there is a negative impact of crime on housing prices[10], there is still no real consensus on the extent of this impact. The availability and quality of crime statistics (e.g, how should one incorporate non-recorded crime?), dealing with changes over time, the displacement effect, and the fact that the housing prices are determined by a complex set of factors and not just crime, are the most important reasons of this lack of consensus.

Another effect of crime is that residents become less committed to their communities, causing the ‘social fibre’ of the community to be weakened. An example of the loss of social capital is that residents of neighbourhoods with a criminal reputation are judged to be associated with criminal activities, leading (amongst others) to stigmas that, for example, prevent those people from finding jobs[11].

Further examples of secondary economic effects of crime:

  • The carbon cost of crime[12].
  • The opportunity costs of police, rescue, and fire departments.
  • Moving costs of residents who want to escape from crime levels in "bad" neighbourhoods.[13]

Methodological issues of economic research

As mentioned earlier above, most crime and economic research studies have to deal with several "information gaps" and some methodological issues and limitations. First of all, there are issues with crime statistics since not all crime is recorded or is differently categorised across different police regions. In addition, not only actual crime, but also the fear of crime (the perceived risk of crime) should be included in analysis. Many studies report incomplete or unreliable data concerning the cost of mental health issues after crime, the exact reimbursement of victims by insurance agencies, costs of "white collar" crime, costs of "victimless" crimes such as illegal gambling, illicit drug crimes, prostitution, etc.[14] On top of that, it is very difficult to quantify subjective costs like pain and suffering or to determine the "willingness to pay" (WTP)[15].

Related subjects

Footnotes and references

  1. SEO (2007): De kosten van criminaliteit [The cost of crime]. Publication Number: 971.
  2. 2.0 2.1 Brand, S. and R. Price (2000): The economic and social costs of crime. Home Office Research Study 217.
  3. For example: How does one economically quantify the reputation of local police with regards to enforcing safety?
  4. Primary economic impact (or direct effects) are generally defined as the initial, immediate economic output generated by a specific cause (in this case a criminal offence). Secondary economic impact (or indirect effects) are generated each time a subsequent transaction is made, for example, the impact of crime on the real estate value in the neighbourhood.
  5. Business companies have to deal with crime, ranging from shoplifting and vandalism to piracy and counterfeiting. These crimes are committed by employees (theft, fraud, money laundering) and by outsiders (shoplifting, vandalism, etc.
  6. Davidson, N. (1999): Costing Burglary Reduction. In Brand, S. and R. Price (2000): The economic and social costs of crime. Home Office Research Study 217.
  7. Detotto,C. and E. Otranto (2010):Does crime affect Economic growth? KYKLOS, Vol.63–August 2010-No.3, 330-345.
  8. Foreign direct investment (FDI) is a direct investment by a business or enterprise in a foreign economy. The motives of FDI are diverse, for example, to reduce export costs (less transport and export tariffs) or to take advantage of local labour forces and know-how.
  9. Tita, G., T. Petras, and R. Greenbaum (2006): Crime and Residential Choice: A Neighborhood Level Analysis of the Impact of Crime on Housing Prices. Journal of Quantitative Criminology Vol 22, No 4, Pp 299-317.
  10. See, e.g.: Pope & Pope (2012): Crime and property values: Evidence from the 1990s crime drop; Ihlanfeldt, K & T. Mayock (2009) "Crime and Housing Prices"; Gibbons, S. (2004): The Costs of urban property crime; or Linden, L and J. Rockoff (2008) "Estimates of the Impact of Crime Risk on Property Values from Megan’s Laws".
  11. UNODC and World Bank (2007): Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean. Report No. 37820.
  12. Criminologist Ken Pease, has revealed the significance of crime on English and Welsh CO² output; an estimated total of 11.6 million tonnes - that's 2% of the UKs' total CO² emissions. See: Ken Pease (2009). The Carbon Cost of Crime and Its Implications. http://www.securedbydesign.com/professionals/pdfs/The-Carbon-Cost-of-Crime.pdf
  13. http://www.aboutproperty.co.uk/uk-property/2007/3/5/crime-and-bad-neighbours-top-reasons-for-movi in Pease, K & M. Gill (2011) Home security and place design: some evidence and its policy implications, p.27)
  14. Shapiro, E. (1999): Cost of Crime, A Review of the Research Studies.
  15. The willingness to pay "is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution" or crime (Source Wikipedia,Online: http://en.wikipedia.org/wiki/Willingness_to_pay)