The Nature of the Original “Firm”: A Coasean Cost-Benefit Analysis of Legalizing Prostitution By Malia Dalesandry Though there have been many studies of matter is that a transaction which society prostitution from the legal perspective, deems socially repugnant is not necessar- the feminist perspective, the societal ily economically inconsistent, but rather perspective, and the moral, ethical, and is also subject to the same tendencies and religious perspective, the current breadth constraints as any other market. Follow- of literature does not include a cost- ing that, perhaps the best solution to deal benefit analysis from which to examine with society’s repugnance and concerns its economic effects. This paper attempts is one based upon an economic approach a comprehensive analysis of legalizing toward perceived moral or ethical prob- prostitution while noting deficiencies in lems. Therefore, we conduct a detailed data and recognizing variations when cost-benefit analysis to determine wheth- interpreting existing data. The most er the status quo (prostitution’s illegality) salient monetary costs and benefits are is in fact the best policy, or whether the discussed and calculated, and many others are included for the sake of practice should be legalized. Currently a more developed examination. After legal in some parts of Nevada, prostitu- a sensitivity analysis and a brief tion is not federally illegal, except within discussion of how Coase’s theorem may be some specific parameters regarding chil- utilized to determine economic efficiency, dren and transportation; thus, the policy the conclusion and final recommendation change considered is that all states legal- is that, because economic benefits vastly ize consensual prostitution among adults. outweigh economic costs, all states could In order to appreciate this analy- benefit economically from legalizing sis from a purely economic perspective, prostitution. prostitution must be accepted as hav- ing similar attributes and tendencies as Introduction any other transaction; personal ideolo- Often called the world’s oldest gies must be set aside in order to reach profession, prostitution has long been objective conclusions. American society regarded as a blight on society, a moral permits a myriad of activities that many shortcoming on the part of the engaged citizens would not condone, including parties, and a failure of humanity that pornography, the distribution of alcohol the practice of selling sexual acts contin- and tobacco products (and even mari- ues to occur. In his book “Defending the juana products, in some jurisdictions), Undefendable,” Walter Block notes that, gambling, and violent sporting events, despite the fact that selling sex is illegal such as boxing matches. That these and has many attached hazards, prosti- activities are not prohibited, but prosti- tutes’ services are continuously sought tution is, seems somewhat inconsistent: out (Block 2008). Perhaps the crux of the all have sellers and buyers; many involve physical contact; many pose a danger prostitution’s persistent illegality. It is that one or more persons could be hurt true that many other industries have high in some capacity, whether physically, costs associated with negative externali- emotionally, or financially. However, as ties, such as certain manufacturing, which society generally allows for “questionably omits excessive pollution; yet, there is still moral” or “ugly” firms, actors, sellers, a market for allowing these businesses and buyers to operate with some con- to practice such unsavory activities. This straints, and as it generally deems that paper now turns to prostitution’s largest people have the right to do what they and most tangible costs and benefits. want with their property (in this case, the prostitute’s body and the labor resulting Economic Costs therefrom), even in the face of potential If prostitution were legalized, the negative externalities, perhaps a detailed first major cost to taxpayers would likely analysis can offer some reconciliation to be the cost of regulation; this may include the benefit of all parties concerned. the cost to develop and maintain new administrative offices for the purpose of The Neoclassical Model overseeing licensing and fees and send- Let us stipulate that prostitu- ing agents to perform routine checks. tion is similar in nature to other markets. Many of the costs would depend upon the Based upon the theory of bounded ratio- degree of regulation the states decide to nality, an integral aspect of the neoclassi- implement; regulations would likely vary cal model, both parties who engage in an from state to state. For purposes here, we exchange must feel that they have ad- will assume regulations would be simi- equate information to make an informed lar to those pertaining to pornography; and rational decision regarding whether of all the “morally ambiguous” markets or not to engage in the transaction. mentioned above, this is most similar to “Exchange” and “transaction” hereafter prostitution in composition and scope. will refer to the transfer of money for sex; It is remarkably difficult to find though, obviously, there are many varia- state budgets for offices or agencies that tions of this scenario, including other regulate pornography, but the most com- forms of payment, e.g., drugs or protec- prehensive data come from Los Angeles tion, and various types of sexual services. County, California, which recently began There are several problems that regulating condom usage among actors. may arise from this exchange, particularly Measure B requires that male porn actors those dealing with asymmetric informa- wear condoms, and producers must ob- tion (the prostitute knows he or she has a tain a permit from the Los Angeles Coun- sexually transmitted disease (STD) while ty Department of Public Health in order the solicitor does not), as well as transac- to film sex scenes. “[T]he two-year cost tion costs, including paying for a “pimp” of the measure would be a minimum of or hired protection in a brothel. But, rela- $582,932” (Garner 2012). Since, accord- tive to any other market, there is little evi- ing to the U.S. Geological Survey, there dence to suggest that these exceptions are are 3,141 counties (or county-equivalent any more problematic or occur with any governments) (U.S. Geological Survey more frequency than the failures or short- 2013), we can figure that, if every county comings that result when one unknowing- has some sort of permit processing office, ly buys a car with faulty brakes or when it may cost taxpayers $915,494,706 per an establishment that serves liquor must year to regulate prostitution [($582,932 x hire “bouncers.” Therefore, aside from 3,141 counties)/2 years]. the moral argument, there must be some This is likely a very high estimate good economic evidence that validates for several reasons and will be modified to Policy Perspectives • 35 36 • The Nature of the Original “Firm” 10.4079/pp.v21i0.13347 suit this analysis. First, it is quite doubtful commercialized vice (ProCon 2012). The that every single county in the US would Bureau of Justice Statistics (2014) defines allow prostitution, just as not all counties “prostitution and commercialized vice” as in the state of Nevada permit it. Further- more, many counties are probably not [t]he unlawful promotion large enough to warrant any real market of or participation in sexual for the activity; many would-be partici- activities for profit, including pants are probably content to go out of attempts to solicit custom- their county to solicit. Just as dry counties ers or transport persons for still exist and therefore do not need the prostitution purposes; to services of state liquor licensing offices, own, manage, or operate a so too could the regulation of prostitution dwelling or other establish- be concentrated at the state level. Since ment for the purpose of pro- Los Angeles County is a relatively large viding a place where pros- county, and most of the pornography titution is performed; or to that is produced in California is produced otherwise assist or promote there, it could be viewed more accurately prostitution. as the epicenter of the state’s pornography industry. It may therefore be more logical Penalties are quite varied for prostitutes, to assume a similar scenario for prostitu- “johns,” pimps, and brothel owners, and tion. Thus, we will consider the 50 states depend upon the number of previous ar- and reach a figure of $14,573,300 annually rests, but “[t]he average punishment for to regulate prostitution [($582,932 x 50 being caught patronizing a prostitute for states)/2 years]. the first time can be a fine of anywhere For multiple reasons, this is from $100 to $250” (Criminal Law Lawyer also not the final cost of regulation. With Source 2014). almost 10 million people and only 4,084 We assume here that some of square miles, Los Angeles County is the those arrested do not end up paying fines most densely populated county in the due to various circumstances, such as country (Discover Los Angeles 2013). charges never being brought or because Since the US is more than 3.5 million of inability to pay. We also recognize that, square miles in area (National Atlas 2013), since fines can be upward of $100,000 for it would be inaccurate to assume that pimps and brothel owners (ProCon 2012), each state’s costs would be confined to but most arrests are of the actual prosti- such a small area. It is fair to consider that tutes and johns, $100 to $250 is likely an major cities would have offices to oversee accurate range, which we will then aver- regulation. Following this, perhaps a city age to $175 per arrest. This results in an that features an international airport is an expected loss of revenue due to failure to appropriate, objective definition of “ma- collect fines of approximately $10,966,900 jor city.” There are 149 major cities with per year [$175 x 62,668 arrests].