Since governments started to collect revenue through imports and export tariffs, and to ban goods, smuggling has been a controversial. Governments oppose smuggling because they lose a significant amount of revenue, they cannot manipulate markets to favor domestic producers, and they cannot prohibit the consumption of goods that they deem immoral. Many citizens see direct benefits from smuggling. It gives citizens access to a larger bundle of goods and it moves the domestic market equilibrium quantity and price closer to the free trade equilibrium. Smuggling has adverse effects on society as it facilitates the growth of corruption, undermine can the rule law, and fund illegal crime syndicates. Depending on the different magnitudes of these effects, smuggling can be positive or negative, and the total cost benefit analysis is dependent on the dominant mode of production created by the institutions and incentive structure. In my paper, I will explore how the cost benefits analysis of smuggling changes depending on the dominate mode of production. My analysis will examine the effect of smuggling in mercantilism, and in a modern western economy.
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When explaining why people choose to smuggle, I will draw from the work of Gary Becker and his model of rational choice theory for crime. When trying to understand the effects of smuggling in Mercantilism, I will build of the work of Peter Andreas(2013) who asserts that smuggling was necessary for America to prosper, Senior (1828) who thinks smuggling rectifies bad laws, and James(1961) who tries to quantify smuggling in 18th century Ireland. For modern markets, I will build off the work of Thursby, Jensen, and Thursby ( 1991), and Bhagwati and Hansen ( 1973) who both explore the effect of smuggling under different market conditions. 1. The Potential outcomes of smuggling In the following section of the paper, I will explore the benefits and problems with smuggling, the condition that incentive smuggling and disincentive smuggling. For my analysis, I will be guided by rational choice theory. My analysis will focus on the effect of smuggling on producers, consumers, smugglers, and the state. In a complete open world economy there would not be any smuggling. The price of every good would be equal once transportation costs were factored in. In the current global economy, import tariffs, export tariffs, the ban on the exportation, importation, and consumption of certain goods inhibits the free flow of goods. As a result of the tariffs, and bans, there is an profit opportunity to provide consumers with smuggled goods. When trade is thoroughly discouraged, the smuggler has been called “essential to the well-being of the whole nation. (Senior 65)” High tariffs, and bans on goods increase the incentivize to smuggle goods. When the tariff is large, then the discrepancy between the world price, and the domestic price is large creating a potential profit for smugglers. When the potential profits gets larger, firms, and crime syndicates have a larger incentive to smuggle goods. An example of this comes from 16th century England as many smugglers would pay the full import tariff on most of their goods and they would were misinvoice goods that had the highest tariff ( Jones 26). When a good is banned, then incentive to smuggle it is the highest because the prohibition of a sale of a good acts as the highest form of taxation(Thornton 172-173). When the sale of an item is banned, it limits the quantity, thus increasing the price. At the same, the high risked involved in …show more content…
Simply put. When the potential cost of smuggling goes up, the amount of smuggling goes down(Beuhn and Eichler 329; Becker 21). As the odds of getting caught increase, the expected value of each good decreases because the smugglers will face legal action if they get caught, so fewer goods are smuggled (Buehn and Eichler 329). Individuals know that if they get caught smuggling goods, they will go to jail, which hurts their long run earning potential. When the economy provides an adequate number of well-paying jobs, individuals have a lower incentive to smuggle because the opportunity cost of smuggling has increased. A reduction of smuggling caused by the increased economic prospect was directly observable in Mexico from 1976 to 2004 as increased wages, and a reduction in unemployment reduced smuggling( Buehn and Eichler
When explaining why people choose to smuggle, I will draw from the work of Gary Becker and his model of rational choice theory for crime. When trying to understand the effects of smuggling in Mercantilism, I will build of the work of Peter Andreas(2013) who asserts that smuggling was necessary for America to prosper, Senior (1828) who thinks smuggling rectifies bad laws, and James(1961) who tries to quantify smuggling in 18th century Ireland. For modern markets, I will build off the work of Thursby, Jensen, and Thursby ( 1991), and Bhagwati and Hansen ( 1973) who both explore the effect of smuggling under different market conditions. 1. The Potential outcomes of smuggling In the following section of the paper, I will explore the benefits and problems with smuggling, the condition that incentive smuggling and disincentive smuggling. For my analysis, I will be guided by rational choice theory. My analysis will focus on the effect of smuggling on producers, consumers, smugglers, and the state. In a complete open world economy there would not be any smuggling. The price of every good would be equal once transportation costs were factored in. In the current global economy, import tariffs, export tariffs, the ban on the exportation, importation, and consumption of certain goods inhibits the free flow of goods. As a result of the tariffs, and bans, there is an profit opportunity to provide consumers with smuggled goods. When trade is thoroughly discouraged, the smuggler has been called “essential to the well-being of the whole nation. (Senior 65)” High tariffs, and bans on goods increase the incentivize to smuggle goods. When the tariff is large, then the discrepancy between the world price, and the domestic price is large creating a potential profit for smugglers. When the potential profits gets larger, firms, and crime syndicates have a larger incentive to smuggle goods. An example of this comes from 16th century England as many smugglers would pay the full import tariff on most of their goods and they would were misinvoice goods that had the highest tariff ( Jones 26). When a good is banned, then incentive to smuggle it is the highest because the prohibition of a sale of a good acts as the highest form of taxation(Thornton 172-173). When the sale of an item is banned, it limits the quantity, thus increasing the price. At the same, the high risked involved in …show more content…
Simply put. When the potential cost of smuggling goes up, the amount of smuggling goes down(Beuhn and Eichler 329; Becker 21). As the odds of getting caught increase, the expected value of each good decreases because the smugglers will face legal action if they get caught, so fewer goods are smuggled (Buehn and Eichler 329). Individuals know that if they get caught smuggling goods, they will go to jail, which hurts their long run earning potential. When the economy provides an adequate number of well-paying jobs, individuals have a lower incentive to smuggle because the opportunity cost of smuggling has increased. A reduction of smuggling caused by the increased economic prospect was directly observable in Mexico from 1976 to 2004 as increased wages, and a reduction in unemployment reduced smuggling( Buehn and Eichler