Economics of Organized Crime
What distinguishes “organized crime” (e.g., the mafia) from a group of individuals who organize to commit some criminal activity (e.g., bank robbers)?
Organized crime refers to a group of individuals working together to commit crimes, usually of an economic nature. Most of these crimes include extortion, protection, gambling, and union control. These groups tend to control small neighborhoods consisting mostly of low-class citizens. Organized crime is mostly associated with Italians, Russians, Mexicans, and Chinese. Petty crime, on the other hand, is committed by an individual or groups of individuals, which are less organized and engage in such ‘street criminal activities as snatch theft and similar activities on a part-time basis. Unlike organized crime whereby the criminal activity is perpetrated for the benefit of the group, petty crimes are committed either for self-benefit or the benefit of a friend.
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Why organized crime (or the mafia) develosp such as the abdication of power, excessive bureaucratic power, existing illegal markets
Three major conditions associated with the development and origins of mafias include the abdication of legitimate government power, excessive bureaucratic power, and the financial potential of illegal markets (Anderson, par. 16). Abdication of power refers to a ‘ruling’ family, which calls the shots in a certain area; this power is usually passed down from father to son. In The Godfather’, Michael and Santino are expected to take over the family business after Don Vito’s death hence creating a kind of a kingdom, which passes legislative laws (Puzo, p. 20).
And the local authority, in most cases, does nothing to stop this. These kingpins usually have the backing of the local administration and police, making them immune to arrests, even though they carry out illegal activities. In The Godfather’, Don’s rival, Sollozzo had an Irish police captain on his payroll (Puzo, p. 38). In terms of business, the mafia directly controls manufactured goods and peasant products traded in the market through their market custodians.
As a market controller, the mafia acts as the mediator between landowners, peasants, and the state as well as the mediator between local and international markets. In return, the mafia develops too much bureaucratic power hence giving way to all sorts of corruption. Mafia’s bureaucratic corruption is characterized by violence or threats of violence as a way of eliminating potential competitors thus monopolizing the market for their selfish gain. Illegal markets develop as a result of the prohibition of certain goods by the government.
How organized crime establishes and enforces contracts
The gangs work together with corrupt bureaucrats in government offices to award exaggerated contracts. Gangs generate a lot of income from these activities; money that is used to bribe and invest in other industries. Local authorities are unable to control these illegal activities because the business transaction between buyer and seller is consensual.
What government roles organized crimes fulfill
Mafia gangs do provide services the government is supposed to provide, especially in regions with weak governance. These services include security and licit and illicit goods. The public pays them in the form of money and loyalty.
How organized crime functions as a business firm
There is a degree of organization within the organized crime group. Within the organized crime group, there exist all the important structures of a business firm including division of labor, formal authority, and structural permanence making it independent from its members. Whereas business firms are characterized by bureaucratic formality, organized crime is based on cooperation and cultural understanding. Nonetheless, there are informal networks that are not centralized, i.e., their members of such groups are more interested in influence rather than position. Organized crimes operate through market monopolization, and “protection” of individuals involved in illicit business through trade associations that also involve legitimate business owners.
Protection of property rights, enforcement of contracts, and the provision of barriers against entry and the organization’s collusive agreements are done by these syndicates. Violence is occasionally used to preserve its reputation as an authority to solve disputes and enforce contracts even though there is usually a voluntary demand for services. The syndicates operate as firms to cover up its governance activities.
The concept of rent-seeking in general terms and in the context of organized crime
Organized crime groups often exercise strict control on the number of competitors under its protection to extract most of the rents accruing to the firms using their services (Fiorentini, p. 438).
Market conditions for the entry and exit of organized crime
Syndicates obtain a point of entry into the market by infiltrating legitimate businesses; through extortionate practices involving various forms of business and labor racketeering. More often than not, legitimate business owners are lured into collaboration with organized crime groups because of the high investment associated with them. Organized crime groups, on the other hand, use such relationships as an effective way to diversify their risks, launder funds, and obtain public respect.
How a stable cartel is maintained
There are two ways of maintaining stable cartel. One of them is its proficiency at deterring or limiting the entry of other cartels into its major businesses. The other way is ensuring that it prevents defections among its members. This is achieved through revenge threats and price wars to frustrate defectors. Quotas are determined and enforced regarding the level of loyalty one has to the cartel or the family relations within the cartel.
The social costs associated with the mafia activities to corrupt government and judicial officials
It is almost impossible to find non-corrupt government officials. This is because affiliation to a powerful organized criminal group is a prerequisite to ‘attractive’ government appointments. A non-corrupt official is usually dismissed to pave way for someone corrupt. Scapegoats are used as a legal measure, once in a while, to restore the public’s confidence in the judicial system.
The ways for the government to gain control of (or limit) organized crime
Governments are unable to control these syndicates mostly because some of them have support within the administration. However, policies have been put in place aimed at controlling organized crime. The use of the criminal justice system is used to prosecute members of these syndicates. Uses of wiretaps witness immunity and witness protection programs, and special grand juries have been affected to indict them. Governments also use the Racketeer Influenced and Corrupt Organizations (RICO) Act to prosecute members of such syndicates.
Economics of Drug Trafficking
The market effects (supply and demand) of drug prohibition
Most governments prohibit the production and consumption of certain drugs within their territory. As a result, there is illegal production of such drugs, despite the high risks of producing them. These risks include arrests, fines, and confiscation of property. The increased risk reduces supply hence increasing the price enormously leading to an increase in profits for producing drugs as well. Vast profits raise the incentives to produce.
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Why drug markets are dominated by a few large firms
Cartels dominate drug markets, i.e., they have a monopoly in the industry. Hence, there is no room for competition and no substitute goods making them gain a greater market. Cartels determine the price of drugs, but the agreement on prices is usually short-lived and there is no major impact on the economy. The absence of output controls does not allow for prices to remain above the competitive level for long. The cartelization of drug markets has led to an increase in violence, mostly between the leading syndicate group and its competitors. This often happens when an opposing group decides to sell their goods outside the price range determined by the lending syndicate group.
The proposed reasons that drug prohibition increases violence (changes marginal benefits and marginal costs of violence)
Empirical studies show that drug prohibition led to an increase in violence. In America, murder rates increased due to increased efforts to prohibit illegal drugs. A study carried out by Jeffrey A. Miron to analyze the relationship between violent crime in the U.S. and the enforcement of drug prohibition revealed that ” the homicide rate is currently 25%-75% higher than it would be in the absence of drug prohibition”(Miron, p. 93). Violence increases due to cartels wanting to avoid infringement by competitors and the need to protect their drugs in cases of gang wars.
Why the authors claim that drug prohibition leads to more (and not less) accidental poisonings and overdoses
Drug prohibition leads to overdoses and accidental poisonings. This is attributed to the fact that under prohibition, drugs are produced and supplied in their concentrated and potent forms that can be easily concealed. Consumers do not put the concentration of the substance in mind so instead of re-diluting they opt to use it as it is thus increasing overdoses and poisoning.
Drug addiction as an irrational behavior
Drug addiction is irrational in that it leads to one behaving out of the norm, i.e., engaging in activities one would normally not engage in. Drug addiction causes loss of appetite, hallucinations, lowered immune system, to list but a few of the side-effects.
Alternative drug policies, their pros and cons
Imposing taxes over that on other goods can be used to lower drug production and consumption, but it can also be detrimental in that it might generate a black market because suppliers can profitably evade the tax, even given reasonable enforcement. Another policy can be government-subsidized drug abuse treatment. This aims at increasing the number of people receiving treatment thus reducing the overall quantity of drug use. However, issues of cost exceeding benefits arise, especially to society, as the only people gaining are the drug users.
Costs and Benefits of a Sports Franchise to a City
Is there a justifiable role for government involvement to attract sports franchises? Explain
In sports, the government must attract sports franchises. This can be done by building well-equipped stadia in cities and funding professional sports. Governments should subsidize sports facilities as it leads to the creation of new jobs. Cities with major league teams also tend to attract more business and attain additional tax revenues and lease payments.
Are privately or publicly supported stadiums the norm? Explain
Stadiums tend to be financially supported by the private sector. Professional teams prefer using private-owned stadiums as they are better equipped and managed compared to stadiums managed by the government.
Describe the investment decision for a city in building a stadium
Investment in a stadium brings with it some benefits. First, there is the creation of jobs for the city’s occupants. The building of a stadium is also associated with revenue and lease payments and potential business prospects.
Describe the general range of some of the rental payments by teams for use of their stadiums
There are several formulas used by franchisees to pay rent for use of facilities. One common way is done through the computation of an annual minimum payment. This is then divided among various categories of sports planned for than a year to work out the payment for each sport. Maintenance costs are either taken care of by the stadium management or the government through its local authority.
Describe the direct benefits and indirect benefits/costs of a sports franchise. Be able to distinguish between the benefits proposed by team supporters and how an economist would measure these benefits
Benefits from the sale of tickets, concessions, and the sale of broadcasting rights to televisions, radio, and the Internet are ways in which major professional teams get their finances. These are known as endorsements. The income-generating capacity of the stadium used for the game also reflects the value of the team. High valued sports generate more revenue than low valued sports.
Describe the possible positive and negative externalities associated with a sports team. How might you estimate these costs?
Positive externalities include growth in employment opportunities, tourism sector, and city “status.” The presence of a major league has a positive impact on residents, especially among the youth leading to a decrease in the crime rate.
What is the multiplier effect? How is the effect overstated in economic impact studies?
Change in government spending usually causes a change in national income. The fiscal multiplier refers to the ratio between these two changes. Multiplier effect denotes the increased national spending due to increased national income. As a result, there is a measurable change in aggregate output generating an equal change in aggregate income.
Evaluate the merits and costs of each method
Stadiums can be financed through government subsidies. This benefits the sports franchise, the government, and the society at large. But this also means that the people have to be taxed a little more so that the government gets funds needed to finance these stadiums and teams. The private sector also finances the stadiums and sports teams. Even though their funds are more sufficient than the government’s, they might decide to pull out of endorsing these stadiums and sports franchises when they are dissatisfied, that is when they are not making any profits.
Anderson, Annelise. The Red Mafia: A Legacy of Communism. In Lazer, Edward P., ed. Economic Transition in Eastern Europe and Russia: Realities of Reform. Stanford, Calif: The Hoover Institution Press, 1995. Web.
Fiorentini, Gianluca. Organized Crime and Illegal Markets. University of Bologna, 1999. Web.
Miron, Jeffrey. Violence and the U.S. prohibitions of drugs and alcohol. American Law and Economic Review, Vol. 1, issue1, pp. 78-114. Print.
Puzo, Mario. The Godfather. United States: G.P. Putnam’s Sons, 1969. Print.