Criminal activities are defined as activities that are illegal. They may or may not be immoral. They are usually classified as (1) crimes against persons, (2) crimes against property, (3) traffic in illegal goods and services, and (4) other crimes.
       Good information on the costs of crime is not available because many criminal activities go unreported and because it is difficult to place dollar values on the results of some kinds of these activities. Some reported "costs" of crime are not really economic costs to the society as a whole but are transfers of income from the victim of the crime to its perpetrator.
       In an economic analysis of crime, it is useful to classify goods and services into three categories: (1) private, (2) semiprivate, and (3) public items. Governments, with their coercive powers, are in a unique position to efficiently produce such public items as crime prevention. Consequently, public goods of this type are usually provided by governments.
       Cost-benefit analysis can be used to advantage in determining the optimal level of crime prevention activities in a society. The cost of crime prevention can be easily determined, but the benefit—much of which is intangible—is hard to estimate. Conceptually, it is the difference between what GDP would be with crime prevention and what it would be without such activities. On the basis of the best estimates that can be made, society should seek that level of crime prevention at which the net benefit to society is greatest. This will be the level at which the marginal social benefit of crime prevention is equal to marginal social cost.
        Once the level of the government's crime prevention budget is determined, it should be efficiently allocated among the different facets of crime prevention activities. These include detection and apprehension of violators, determination of their guilt or innocence, and corrections. The most efficient allocation of the crime prevention budget among these facets is determined by applying the equimarginal principle. The most efficient allocation will be such that the marginal social benefit from a dollar's worth of detection and apprehension is equal to the marginal social benefit from a dollar's worth of each of the other two facets of crime prevention.
       Economic analysis is also helpful in determining whether goods or services should be considered illegal. Typically, when an illegal activity is made legal, both supply and demand increase, although in most cases the increase in supply can be expected to be greater in degree than the increase in demand, leading to a fall in the equilibrium price of the activity and an increase in the equilibrium quantity purchased. Additionally, it is reasonable to expect the quality of the good or service to increase. In each case, just the reverse may be anticipated if a currently legal activity is made illegal.
        Economic analysis is also useful in understanding the motivations of individuals to commit certain crimes. A rational individual can be expected to enter into a criminal activity if the revenue generated from the activity is perceived as being greater than the cost. It is important that all revenues (from both money income and psychic income) and all costs (both explicit and implicit) be taken into account. With the balance sheet properly understood, society can make more effective use of the equimarginal principle in its attempt to protect itself from crime.