John Irons's Blog

Icon

Economic News, Data and Analysis

The Cost of Crime – How to value a life

How to value a life.

Why 6.1 million? I can hear many of you yelling at the screen “But a
human life is priceless!”.

Well, first let me shatter that illusion, a life does not have infinite
value. If a single life were infinitely valuable, then we should devote
all of our resources to saving a single life. Did you buy a cup of coffee
today? If so, that 50 cents could have been put towards buying a new bath
mat, or any other safety device that could protect your or someone else’s
life. Even by driving to work in the morning you are risking your life
and other’s. If the value of life were indeed infinite we would never be
prepared to increase risk in any way, and we would never devote any resources
to any non lifesaving activity.

Since we do engage in risky behavior and spend money on coffee, movies,
computers, and other luxuries, we must be placing an implicit, and finite,
value on life.

Since I have now (hopefully) convinced you that the value of life is
finite, we should be able to, in principle at least, be able to measure
its value. Here’s an example to show you how it might be done.

Suppose that you are considering buying a new car. This car has an option
for a super sophisticated new air bag system which will save your life
in 1/4 of the cases of an otherwise fatal crash. Say that the odds of getting
into such a crash are 1/100. So, the odds of having your life saved if
you buy the device is 1/400.

The device costs a hefty 10,000, so you decide to take the risk and
decide not to buy the air bag. By making this decision, you are saying
that the the expected benefit of the device is not worth the cost.

expected value of life; no purchase > expected value of life; with
purchase

The expected value of a life under uncertainty is given by the mathematical
expectation operator: the value of an uncertain outcome is p * X + (1-p)
* Y where p is the probability of receiving a payoff of X and (1-p) is
the probability of receiving payoff Y. (I will also assume what is called
“risk neutrality,” but the calculation can be done without this assumption).
Since, with probability of 1/400, you’re dead and get nothing, this gives
us:

(399/400) * value of life + 1/400 (0) > (value of life – $10,000)

Using some simple algebra…

(1/400) value of life  < $10,000

value of life < $4 million!

Of course, more careful estimates look closer at the probabilities and
describe better the behavior of people, but this is the general idea –
by looking at the risk taking behavior, we can form some idea about how
people place a value on their own life.

The $6.1 million number comes from an average of several previous studies
on the topic. For more details see W.
K. Viscusi
, “The Value of Risks to Life and Health” in the Journal
of Economic Literature 31(4) 1993 for a complete review. Also see Risk,
Regulation and Responsibility
on the web.

Disagree? Too high? Too Low? Think a life is worth more than 6.1
million?


Post
your thoughts in the Forum.

Advertisements

Filed under: Economics

The Cost of Crime

April 20th will mark the one year anniversary of the massacre at Columbine
High School in Colorado. While the event was tragic, it represents only
a small part of the total amount of crime in the US in any given year.

A recent paper by David
Anderson
of Centre College in the Journal of Law and Economics tries
to tackle the monumental task of quantifying the total yearly cost of all
crime in the US. The thought experiment to conduct is to ask how much we
would save if we lived in a totally crime free environment. For those of
you who are impatient, the total is 1.7 trillion dollars per year.

So where does this number come from?

Crime related production

A significant part of the U.S. economy is devoted to the production
of goods and services that would be unnecessary of we lived in world with
no crime.

Think of all the money spent on locks and safes ($4 billion), police
protection (47 billion), surveillance cameras (1.4 billion), jails (35
billion), computer virus screening and security (8 billion), airport security
(448 million), and even guard dogs (49 million). The biggest part of this
production comes from drug trafficking ($160 billion). A crime-free society
would mean that we would not need federal agencies to fight crime (23 billion)
and we would not need the medical care to treat the victims of crime (8.9
billion) or children born with exposure to cocaine and heroine (28 billion).

The total of these and other sub-categories adds up to over $397
billion
annually.

Opportunity costs

In addition to the direct cost of resources devoted to crime, there
is a sizable loss of time by people who are potential victims
of crime and by those who have committed crime. And as the saying goes
– time is money.

How much time do you spend locking and unlocking your home, office,
car, and gym locker each and every day? Anderson suggests that 2 minutes
a day is a reasonable estimate for the average time spent per person per
day, and that people spend on average another 2 minutes looking for their
keys (based on a survey and by direct observation).

So, 4 minutes a day in total is wasted because we fear leaving our possessions
unlocked. This may not seem to be much until you consider that there are
365 days a year and around 200 million adults in the country. Multiply
this by the hourly value of your time (which is given by what you could
be making from working for an extra hour or having an extra hour of leisure),
and this gives a whopping $89.6 billion cost in lost time simply from locking
and unlocking!

In addition, if there were no crime, there would be no criminals. Instead
of working or sitting idle in jails, these people – over 1 million of them
– could be productive members of the economy, chalk up another $35 billion.
Also, there is much time lost in planning and executing crimes – 4.1 billion
worth.

Then add to that the value of work time lost by victims (876 million)
and the time spent on neighborhood watches (655 million).

The grand total for lost time comes to $130 billion.

Life and Health.

Above, we accounted for the cost of medical expenses, but surely we
should also value life and health in addition to the direct costs incurred
by the medical system.

With the approximately 72,000 crime related deaths a year and the 2.5
million crime related injuries every year, we would expect this to be a
large number.

To get the total, we now have to put a dollar value
on a life and also on injuries. No problem, a
life is worth $6.1 million
and an injury is worth $52,637. (See
sidebar
).

With these numbers, the total cost of crime for lost life and health
comes to $574 billion.

Transfers

In addition to the above we might wish to add the cost of property
and money that is stolen or obtained through fraud.

Included in this category are fraud at work ($203 billion), unpaid taxes
(123 Billion), health insurance fraud (108 billion), auto theft (8.9 billion)
and many others. In case you were wondering, coupon fraud racks up $912
million annually.

But should we count this as a cost of crime? It simply represents money
(or property) moving from the hands of one person to the next – your loss
is my gain, and so the net cost may be zero! However, there are
also significant resources devoted to committing these crimes, and so there
may be a loss.

In any case, the total comes to $603 billion.

Total

So lets review, the table below shows the total costs of crime, and
it comes to either 1.7 trillion including transfers or 1.1
trillion
without.

The total bill then comes to $4,118 per person per year — crime is
not cheap.

 

 

Value ($)
Crime induced production   397
Opportunity (time) costs   130
Risks to life and health   574
Transfers   603
     Gross Burden 1,705
     Net of Transfers 1,102
Source: Table 7 D. A. Anderson, “The Aggregate Burden
of Crime,” Journal of Law and Economics, XLII(2) 1999. Download.

Links From the Web

David Anderson’s web
site



The Aggregate Burden of Crime: Download

Filed under: Economics

Pages

Archives