Corruption in the American prison system has run rampant as state governments look for an easy way to cut costs. Media investigations have uncovered appalling conditions in our nations' jails by private management companies that have been contracted to run the prison system. As states look to capitalize on the prison system, the financial burden is increasingly being placed on the families of inmates, forcing them to pay for the inmate's room/board, electricity, clothes, and other necessities. Historically, the inmates' families have used a govt. system to wire or mail money to their relatives with little or no fees. But in a recent example of outsourcing, almost all states have switched over to the private market for their banking, requiring funds to go through a contracted company called JPay. The Time's article details some of the extortion-like policies that JPay is using to squeeze families out of their money. Fees to wire money can reach 45% and one woman claims that sending money for her son to buy a pair of underwear costs her $100. By all accounts, JPay is a questionable company that has a complete monopoly over the prison banking system.
JPay vs. a public prison banking system highlights the complications of making a public-good(or service) private. Changing to a private system could potentially create savings from all parties and would have made Buchanan a very happy man. But corruption, greediness, and a near monopoly has led to a broken system. Perhaps if the monopoly was broken up, an open market could find a amiable solution but for now, many families are feeling the pain from losing a public service.
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Prisons are interesting—perhaps even unique—examples of public goods because the beneficiaries, law-abiding citizens or Party “B,” are distinct from the cost-inducers, the prisoners or Party “P.” For conventional club goods like swimming pools, Buchanan believes that excludability is a sufficient condition for allocatively efficient private operation. Profit-seeking operators will exercise their inclusion/exclusion rights to arrive at membership size that maximizes the utility of members. Contrast this with the operation of prisons. Party B typically derives utility from decreasing the utility of Party P (to maintain the deterrent value of prison, to express moral condemnation, etc.). Thus in the objective function O = UB + αUP, α is negative and |α|>0 (presumably >0.5). Because Party B also seeks to minimize their share of prison maintenance costs, their rational preference is to externalize such costs to Party P: the non-beneficiary third parties in Party B’s negotiations with contractors.*** Conveniently, this is a costless way to decrease Up and thereby increase UB. Outsourcing prison services to private companies like JPay that isolate and inflate costs to prisoners (and their charitable backers by extension) can be seen as a rational policy insofar as it produces publically demanded negative externalities and wealth transfers. Party B might justify these preferences on normative grounds: prisoners should compensate society for the negative externalities they impose via deviant behavior. While the morality of this justification is certainly up for debate, JPay’s price gouging is not self-evidently inefficient for society as a whole.
***These negotiations only indirectly represent the preferences of Party B when Party B seeks to reduce decision costs by delegating negotiation to the state. The allocative efficiency of the negotiated outcomes, therefore, hinges on at least three assumptions: 1) that the state possesses perfect information regarding Party B’s preferences, 2) the state’s preferences perfectly coincide with Party B’s and 3) that Party B is overwhelmingly larger than Party P. All three of these assumptions are highly contestable and vary across jurisdictions. I believe that economic critiques of prison outsourcing should focus on disputing these assumptions, recognizing the fundamental differences between prisons, other public goods, and club goods.
Based on our discussion today, I bet that Tullock would be disappointed to see the way that our prison management system is working. If it is the case that JPay bid against other companies to gain the government-sanctioned monopoly on prison currency distribution, then both JPay and other companies (and the state) are contributing to a wasteful system. With higher price on money transfers, the quantity of transfers (and probably the dollar amount transferred each time) will decrease. As the article that Sean included points out, some prisoners do have to pay for the most basic of necessities such as water and toilet paper, but other goods are available to prisoners too, such as dessert items and care packages. With a higher cost of transfer, prisoners' families will be less likely to contribute money toward non-necessities.
There is more at stake here than prisoners not getting dessert items and care packages, however. With a decreased amount of transfers, the workers and technology used to create the extra transfers that would exist in a competitive system (the difference between Qc and Qm) will be spent on creating other services. As the graphs we drew on the board today show, those extra workers and technologies will not be as valuable if they are used to provide services other than transfers.
JPay's particular system is inefficient on another level as well. As prisoners' families face higher costs for transferring, they may feel an increased temptation to use illegal methods of gaining the money they need for transfers (stealing, selling drugs, etc.). If one of the goals of having a prison system is to increase law-abiding behavior, the current money transfer system is taking a step in the opposite direction.
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