Substitution Effect: When Security Guards are enough for Public Safety

Commentary, Featured — By Paul Tyahla on February 10, 2011 at 7:18 AM

Mark ‘Jay’ Williams
Economics Fellow, Common Sense Institute of New Jersey

In July, the New Jersey Privatization Task Force, charged by Governor Christie, identified a set of privatization tools and strategies that would save the state an estimated $210 million annually. The task force did identify well-established privatization opportunities, but failed to take into account how consumer choice theory could optimize the service/cost mix.

Particularly at this time, when at least two New Jersey counties are conducting studies on countywide police force consolidation, optimizing the ‘security service/mix’ will create a long-term effective and efficient system that is more sustainable economically.

Within consumer choice theory, there is a fundamental theorem of demand known as the substitution effect. It states that the rate of consumption falls as the price of the good rises. Consumers will substitute away from higher priced goods and services.

We see examples of this in our personal choices and in best business practices, but taxpayers seldom demand it from their government. However, there is a fundamental problem applying economics to government services - there rarely is a two-good example (choice requires there are at least two goods, either complementary or substitute).

With an increased debate on the cost of public safety, the substitution effect would be employing both ‘police’ and ‘guards’ as the two-goods. Many of the functions of the police, such as administration, traffic, and burglary investigation, could be less costly if performed by lower-paid guards than the higher cost and more highly trained police.

Oakland, California recently discovered that it costs $200,000 annually for one uniformed police officer vs. $50,000 for a contracted private guard. As a result, Oakland is experimenting with the use of private, unarmed security guards for low-intensity missions.

A June 2009 RAND Organization report, The effect of business improvement districts on the incidence of violent crimes, suggests the implementation of Business Improvement Districts (BID) was associated with a 12% reduction in the incidence of robbery, and an 8% reduction in the total incidence of violent crimes. Business Improvement Districts rely on special assessment levied on commercial properties located within designated business areas to augment services typically provided by public agencies, such as public safety and security. In most cases, the security was provided by private guards at a less-expensive fixed cost. They did not replace any police officers; they augmented as a force-multiplier.

Business Improvement Districts (BID) are typically public entities, chartered and regulated by local governments, and the services are managed and operated by private sector non-profit organizations that hire or contract with the service providers. This model has worked in many New Jersey communities, and should be fully explored to learn ways in which it can be expanded.

There are other examples of lower-cost public or private guards being utilized both within and outside New Jersey municipalities for low-intensity functions.

The Mercury News reports that Santa Cruz, California uses private security guards to supplement police patrols in the downtown area as part of a pilot program paid for by the Santa Cruz Police Department. The city’s police chief said, “We are looking for more creative, less expensive ways to provide additional public safety resources downtown’, and the private security officers ‘will not carry guns and have no police powers. They can detain people - akin to a citizen’s arrest - and will notify police dispatchers of problems that require the attention of a sworn officer.’”

An October 2010 Temple University paper published in Budget & Tax News, Private Police Services Could Benefit Communities, states, “Communities could save money and enjoy better police response by handing some police duties to private entities.” The paper identifies Salt Lake City’s Verified Response program, “in which private security guards respond to burglar alarms. If they see evidence of a break-in or other problem that needs police assistance, they call police.” The Temple University report further states, “There are other important reasons to involve private firms instead of police, including changes in the kinds of crimes that are being committed and in the technologies that are being used.” Examples stated are economic crimes that involved information technology, accounting and legal issues, and the growing trend of counterfeit goods, all crimes that involve specialized training.

The economics of balancing the public safety service/mix through lower-cost force multipliers goes beyond the immediate salary savings. A recent study by the New Jersey Taxpayer Association, The Millionaire Next-door, notes that a New Jersey police officer who retires at 50 –years-old earning the statewide average $105,000 salary with 25-years of service is eligible for full retirement. This police officer’s first year pension would be $68,000, and would total $3.2 million at age 79. The officer would have paid only slightly more than $100,000 into the Police and Fireman’s Retirement System.

What constitutes adequate public safety will remain a much-contested issue. However, the economics question is what the public would choose if they were given a genuine choice in the allocation of resources. Many communities would quickly understand the economic savings of having low-intensity functions performed by guards, and seek equilibrium of the two-goods that are sustainable in safety and economics.

New Jersey’s taxpayers are among the nation’s most active and well-educated, but they are rarely given a menu of choices by their elected officials. Our communities deserve the freedom to make those decisions.

Mark Jay Williams is an Economics Fellow at the Common Sense Institute of New Jersey.

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