The systematic operation of “protection” provision usually undertaken by groups of

individuals belonging to a wide network of organized crime is one of the most notorious

income-generating processes relating to the organism most commonly known as “the mafia”.

This manoeuvre creates a spillover effect destined to invest society as a whole, which stems

from the perception of such service as a public good, and therefore subject to the same

properties of non-rivalrous and non-excludable assets.

Prima facie, mafia protection may be mistaken for a private endeavour, as such “safe

keeping” is provided only under regular compensation on the part of the “client”.

Nevertheless, even when privately-supplied, its consequences come to influence even those

that were not included in the activity in the first place.

When the mafia ensures “protection” in a neighbourhood, it deters theft, vandalism and

similar criminal enterprises. This benefit is allocated to everyone nearby, not just to the

payers. Thus, even a shopkeeper who does not pay may still enjoy more stable business

conditions, lower crime, and fewer extortions by others.

The spillover benefit is a positive externality.

In the circumstances just presented, free-riding becomes a significant complication for the

mafia, for which violence becomes the favoured and most efficient solution to internalize said

externality (Schwuchow, 2023).

A free-rider is someone who enjoys the environment created while refusing to pay the price

for it. If free-riding were to be tolerated paying customers may realize they could benefit

without paying and the organization’s revenue would collapse. As such, protection becomes

non-excludable unless force is used.

In standard economics, externalities are internalized by taxes, enforcement and prices. As the

mafia cannot rely on courts, governments or contracts, it uses violence as a substitute.

Violence punishment works through the alteration of the payoff structure.

Without punishment:

Free-rider payoff = Protection benefit – 0

With punishment:

Free-rider payoff = Protection benefit – Expected violence cost

Expected violence cost =(Probability of punishment) × (Severity of punishment)

If the expected violence cost is greater than the protection fee then paying becomes the

rational choice. Violence thus acts in the same manner a private tax does on non-payers.In order to raise the expected cost of free-riding and prevent others from attempting such a

practice, punishments are often disproportionate, harsh and publicly visible, as well as

instrumental and strategic. Economically, this lowers enforcement costs while maintaining

compliance.

For the aforementioned reasons, violence plays the role that exclusion has always held in

legitimate markets, in which firms exclude non-payers by refusing to let them have access to

their services. However, the mafia cannot selectively exclude protection, as crime reduction

affects the entire geographic location of interest. That being the case, it has gradually adopted

the approach described, based on aggressive and threatening selective retribution, known as

“negative inclusion”.

This technique, in turn, converts protection from a public good into a club good, making it, in

practice, excludable. It would be incorrect, nonetheless, to assume that this has always been

the true nature of criminal protection. It is, in fact, absent from the first stages of the

phenomenon, so we were not going in the wrong direction when we previously mentioned

protection as a public good.

This is an extremely significant and deeply conceptual shift.

Ex ante, whether you pay or not does not change the protection you receive. That violates the

definition of a club good, making it a non-excludable public good. When, however, the

externality begins to affect profits and internalization becomes a necessary means, the use of

violence produces a crucial variation by introducing a targeted disutility that applies only to

non-members.

By this means, a private actor supplies protection without the need of legally enforced

contracts by reshaping the excludability and the inner nature of the product it is exchanging

with the public. Violence, in this setting, is the enforcement technology that acts as a tax and

substitutes for the law.

This has incredible consequences from a theoretical point of view, as it shows that (coercive)

excludability can be endogenously created, institutionally enforced and pay-off based rather

that access-based.

The increasingly alarming evolution of mafias into proto-governance structures finds in the

content just presented the basis for a more complex and serious development, which emerges

most often where weak formal institutions and inequality allow for the construction of an

illegal monopoly enclosed in a violent, criminal framework. “Soeren C. Schwuchow, 2023. “Organized crime as a link between inequality and corruption,” European Journal of Law and Economics, Springer, vol. 55(3), pages 469-509, June.”

Author: Giulia Carluccio