Enforcement Costs and the Optimal Magnitude and Probability of Fines

Abstract

WHENEVER the government uses fines to control harmful activities, it incurs certain costs in connection with the enforcement process. This article will show how these costs affect the optimal magnitude of fines and the optimal degree of enforcement effort-that is, the optimal probability of detection of those who commit harmful acts. We will distinguish between two types of enforcement costs. Fixed enforcement costs are costs that do not depend on the number of individuals who commit harmful acts. These costs would include, for example, the expenses borne by a pollution control agency in testing water quality in a lake. Variable enforcement costs are costs that do depend on the number of individuals who commit harmful acts, such as the costs of prosecuting and penalizing polluters. In our basic model, we assume that the fixed enforcement costs are the costs of maintaining the probability of detection at a certain level and that the variable enforcement costs are the costs of fining individuals. The main conclusions of this article may be summarized as follows. The optimalfine equals the harm, properly inflatedfor the chance of not being detected, plus the variable enforcement cost of imposing the fine. If the fine is of this magnitude, the expected fine will equal the harm caused by the harmful act plus the expected increase in enforcement costs occasioned by it. For instance, suppose that the probability of detecting a