ECON451 Lecture Notes - Lecture 6: Risk Neutral, Random Variable

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9 Aug 2016
Department
Course
Professor
Bi-causal Accidents
Both victim and injurer can take precautions
Timing matters
Crime
Government imposes sanction
Fines or prison
What is the goal of criminal justice system?
Deterrence
Justice  Retribution – you harmed someone so you will be harmed
Incapacitation  if you've proven to be criminally inclined we will lock you up so you
don't harm others  extreme form of deterrence
Rehabilitation
Efficient level of crime is NOT ZERO  WHY? Because it is too costly to deter
We will be talking about how criminals are rational (in the economic sense)  that is to
say, they respond (and react) to incentives.
(Expected) Utility of NOT committing crime  normalize pay-off (utility) to W
(Expected) utility of committing crime 
Let P be the probability of being caught
Let S be the sanction (monetary terms)
Let W be the person’s initial wealth
Let b be the benefit from committing crime
Pu*(b, W-S) + (1-P)u(b, W)  explain equation and what U stands for
If risk neutral  P[b + W - S] + (1-P)[b + w] = b + W – P*S
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