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Internalization of an Externality: The Case of Incarceration

Available on Wednesday, December 2, 2020 1:45 PM EST until Wednesday, December 9, 2020 12:00 PM ESTSubscribe

Dear ECON 203 Students:

So what to do for your final DB?  In my view, it should be something topical, i.e., in the news and related to the Week 7 or Week 8 content; something encapsulating, i.e., something that brings together different aspects of the course; and something that helps you see the breadth of microeconomic analysis so that you’ll be encouraged to follow results of future studies for the rest of your lives.  That’s a long sentence and a tall order!  No matter.  You’re up to the challenge.  So have at it.

It turns out that a new study was just published in a well-known economics journal on a fascinating suggestion about to lower incarceration rates, an issue we’ve heard much about these past months of our annus horribilis.   Click on the link below and read only section I, the introduction, which spells out nicely the issue, the research methodology, and the author’s conclusion.  Keep in mind that you’re reading the actual professional paper, not someone else’s review of it.   


Your task?  Please note that you’ll find at the end of Exercise 7 a question #6 that contains a graph of demand (MB) and supply (MC) curves.  Illustrate the conclusion of the study on this diagram and explain what you did in the first paragraph of DB 7 below.  (Hint:  you must only add in one curve!)  So don’t be fooled.  DBs and theoretical concepts are integrally linked.

For the remainder of primary post, answer the author’s question posed in the introduction:  “Why might decision-makers be sensitive to costs?”  Aside from one suggestion, the author does not delve into the mechanisms that explain the paper’s important conclusion.  Perhaps you can help!

To be eligible to receive extra-credit points, you must make your first post by the Sunday evening deadline.  And you must make two follow-up posts.  Failure to do either of these disqualifies you from receiving any extra-credit points.  After all, if you do not complete an extra-credit assignment, you should not receive extra-credit points.  If, however, DB 7 is a make-up DB, you’ll be graded as per the criteria used for the first previous six DBs.

Best wishes for a lively discussion.  You’ll see that even your slog through microeconomics modeling has prepared you to think critically about contemporary policy debates.  As you might or not might recall, that is our primary objective!

Best wishes,

R. Chaney

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Post by  Andrew Shepherd 


                To question The United States prison system is a topic that everyone seems to have a halfhearted opinion on. Many folks agree that the prison system is flawed, how to fix it is another matter. This aside it needs to change. Aurélie Ouss (2020) stated “This paper demonstrates the role that incentives also for play in choosing crime control policies” (p 13). I would say his paper does a good job of outlining the conflict that is created when imprisonment becomes the target, not rehabilitation. Ouss (2020) notes in his discussion that, “In the context of juvenile law enforcement, I find that internalizing costs resulted in less incarceration, with no immediate increase in offending” (p 12). He has found clear indication that when a community or state is expected to bear the brunt of the cost, they view the choices they make in a different way. This is further highlighted by Ouss (2020) in figure 9 (p 11). Ouss (2020) notes that there is “…no discontinuous change in the number of juveniles being arrested” (p 12). Speaking to the time after reforms had taken place in California. Ouss (2020) notes that this could have exterior influences such as Police officer discouragement at the due to leniency in criminal justice (p 12).   

                My take-away from this is supports the conclusion that clearly finance matters in the case of prison systems, but what is probably more important is “who” is doing the financing. When changes are made and the burden of cost comes down to the community that crimes are committed in, the data will change greatly. If prisons remain for profit, or funded federally, things will continue as they are.

                That was the introduction. “Why might decision-makers be sensitive to cost”? Simple, if it costs more, they get more money. If profit margins are lowered, or better, the cost is pushed locally, choices will be made that probably look something more like reeducation, and reform of prisons are opposed to strictly incarceration. Longer sentences mean more and continued federal funding. We have a snake eating its tail (or better, a snake giving birth to itself eating its tail). Remove the funding, the whole system changes and perhaps we might look at helping people to reform and reenter civilization after their punishment for the crimes against it that they have committed.

                But what about crime? What about true heinous crime?

A monstrous idea that would cost a lot, and possibility resolve the problem. Let us call it a 10-year rule. Some basic set of truly heinous crimes result in rapid post trial execution. Next level crimes result in education program within a prison. The offender will be given a 10-year sentence. If within that 10 years, the prison completes a certified trade or education program they are released that day. If they do not, they are executed. If they re-offend, they are reentered into the 10-year program. If they finish a second education trade or certificated, they are released. If they offend a third time, they are executed rapidly post trial. This program would be run and funded locally. People need to face their justice system and own it. The good and the bad.

Problems with this would include initial startup cost, reevaluation of current inmate populations, and societies acceptance of a much higher and quick penial system that has a higher rate of offenders being put to death.

This is a monstrous idea, the question I would pose is it any less monstrous than our current systems where longer inmate sentences mean more money for the prisons? I do not think it is. Decision-makers are stuck in a loop. If they make any decisions that change the system funding will be cut.

Andrew R. Shepherd

Ouss, A. (2020) Misaligned incentives and the scale of incarceration in the United States. Journal of Public Economics, 191, (2020). http://aouss.github.io/ouss_incentives_justice.pdf

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Post by  Juan Salinas 


Decision maker are sensitive to costs because they are paying for it.  Any company or organization that is spending more money is losing revenue.  The managers/decision makers have to take into consideration what and how much they are spending and in comparison to what they will get. In the case of incarceration, if the counties are having to pay a larger piece of the yearly bill for the people they incarcerate, they will reconsider what the punishment they impose.  The more people that are incarcerated, the more money they will have to pay.  Those counties now will have to decide whether they pay the amount or look for more cost effective rehabilitation programs. 

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