Question

Most people conclude that the costs outweigh the benefits of a robbery. Yet some willingly engage in such activity. Are they miscalculating, or do they value costs and benefits differently? Explain. What does this tell us about cost-benefit analysis?

Answer 1

People who willingly engage in activities like robbery either overestimate the benefits or undermine the costs (or both) of such activities. However, it is not necessary that it is always a miscalculation (it may or may not be). For there can be subjectivity to costs and benefits measured and then it depends on person to person. As example, benefits from a robbery not only include the monetary benefits, but also how much welfare can be increased by spending the money. And note that it is difficult to measure welfare of every person with a standard measure. It also depends on alternate opportunities available to make money through legal channels, which again is diificult to quantify. Sometimes, a person may attach more value to money rather than ethics. All these will then determine the total benefits of a robbery. All these factors may add up to monetary benefits of robbery and inflate total benefits.

A person can underestimate costs on following accounts:

1. Bad law implementation and the person knows he can scape scot-free.
2. Inadequately punitive or soft laws against such illegal activities.
3. Social stigma attached to such people.
4. Moral values

All these factors are not universal or standard and may vary person to person. So even if it might seem that robbers underestimate these costs, for them, it is the right calculation, otherwise they wouldn't be robbers in the first place.

This brings to light the inability of cost-benefit analysis to factor in value judgements or subjective incentives of benefits and subjective interpretation of costs. These costs and benefits are not quantifiable so do not appear in the analysis but work very well in the back of mind and play an important role in taking decisions.