Optimal law enforcement with costly public funds

In this paper, we amend the standard model of law enforcement, by introducing a marginal cost of public funds. We derive the associated optimal enforcement policy. We show that, as the marginal cost of public funds increases, the objective of raising public funds gradually replaces that of deterring harmful activity and that the optimal policy varies accordingly. In particular, we prove that, when the harm caused by the illegal activity is sufficiently small, tome overdeterrence will be optimal for sufficiently large marginal cost of public funds. (C) 2010 Elsevier Inc. All rights reserved.