The Economics of Prisons and Incarceration

What prisons cost, the different ways they may reduce crime, and why economists debate whether current levels of incarceration are worth it.

Prisons are one of the most expensive tools a government uses. Deciding how many people to imprison, and for how long, involves real trade-offs that economists try to measure.

Four ways prison might reduce crime

Prison is expected to reduce crime through several channels:

Deterrence: the threat of prison discourages people from offending.
Incapacitation: a person in prison cannot commit crimes in the community.
Rehabilitation: education, treatment or training may reduce offending after release.
Retribution: this is a moral goal rather than a crime-reduction one, but it shapes public support for prisons.

The costs

The direct cost is high. In the United States, estimates of the average cost of keeping one person in prison for a year commonly range from around 30,000 dollars to well over 60,000 dollars depending on the state. Some states spend far more.

There are also indirect costs, which economists call opportunity costs. A person in prison is not working or paying taxes. Their family may lose income. A prison record makes it harder to find a job after release, which can increase the chance of recidivism, meaning reoffending.

Diminishing returns

Many economists argue that incarceration shows diminishing returns. When few people are imprisoned, those who are tend to be the most dangerous, and locking them up prevents a lot of crime. As incarceration expands, more of the people imprisoned are lower-risk, so each additional prison place prevents less crime. The United States incarcerates a larger share of its population than almost any other country, which has led researchers across the political spectrum to ask whether it has passed the point where extra prison places are worth their cost.

Comparing two budgets

Imagine a state could spend 50 million dollars to hold 1,000 more people in prison for a year, or spend the same amount on more detectives, drug treatment and job training for people leaving prison. The economic question is which option prevents more crime and harm per dollar. Evidence suggests the answer depends on who would be imprisoned and how well the alternatives are run.

Counting only the prison's budget

The price of a prison place in a government budget is only part of its cost. Lost earnings, harm to children who lose a parent to prison, and the higher chance of reoffending after release are real costs too, even though no single agency pays them.

Key takeaways

Prison may reduce crime through deterrence, incapacitation and rehabilitation.
Direct costs per prisoner are high, and indirect costs include lost earnings and harm to families.
Incarceration likely has diminishing returns as more lower-risk people are imprisoned.
Economists compare prison with other uses of the same money, such as detection and treatment.