Crack, Internalized Externalities, and Game Theory in Law Enforcement

One of the most important insights in the world of economics is the idea of an externality. It’s a simple idea: if Alice and Bob make a transaction that screws Jim, but Jim doesn’t have a say, then neither Alice nor Bob will care about Jim’s well being, and that transaction will happen way too often. One classic example of this is pollution: when I buy electricity, I don’t pay for the pollution, except for the tiny bit of my own pollution that gets to me. The soot from the coal burnt to make my electricity is spread out over millions of people, so it doesn’t make a difference to me. Another good example is selling crack cocaine.
Much like pollution from coal plants, the negative impact of crack spreads out far beyond the buyer and the seller. Everybody knows that selling crack destabilizes the community, but truth is that one dealer doesn’t make much of a difference, so no one dealer has an incentive to stop selling it. However, if one crime group has a monopoly, they see a huge benefit in having a stable community (more people make money, more money is available to be spent on illegal stuff, crime boss makes more in the long run), which is exactly what the crime bosses in some of Rio’s favelas claim is making them stop selling crack

“Crack has been nothing but a disgrace for Rio. It’s time to stop,” said the drug boss in charge. He is Mandela’s second-in-command — a stocky man wearing a Lacoste shirt, heavy gold jewelry and a backpack bulging with $100,000 in drugs and cash. At 37, he’s an elder in Rio’s most established faction, the Comando Vermelho, or Red Command. He’s wanted by police, and didn’t want his name published.

Because the corrosive effects all eventually come back to the crime boss in the form of a damaged community, and ultimately less personal safety and reduced income.
There is, however, another plausible explanation here, and that comes from game theory of law enforcement. With the new crackdowns on crime in the favelas, organized crime no longer has a free hand–they have a legitimate fear of being raided and put out of business, or worse. That said, they also know that police are interested in reducing violence, and so will likely address the most violent areas first. Which is to say, whatever a crime boss’s personal tolerance to violence is, you really don’t want to be on their radar as a “most violent” community. So even if the profits from crack made the violence worthwhile, the violence is more of a liability, so there’s a real incentive to not be the most violent area.
There you have it. Two really good reasons why criminals might give up a highly profitable activity out of nothing put pure Hobbsian self interest.