The “world’s oldest profession” prostitution – has been around for millenniums (Head, 2012) –, but because of rapid urbanization, rapid human population growth, and new sexually transmitted diseases (STD) such as HIV Aids, the debate on prostitution is raging most fiercely than over. There’s a plethora of questions that are being asked: Is prostitution bad; what should we do about it; how do we protect the victims of the “sex industry”; is there such thing as voluntary prostitution? Of all the issues debated, the most notable and pertinent is the one regarding the legalization of the prostitution industry. Particularly, how and to what extent will the liberalization/ decriminalization/ legalization of the prostitution industry affect government incomes, industry standards, crime, and other social externalities?
Through philosophical and economical argument, this paper will attempt to illustrate the need for regulations of the prostitution market as well as the nature of the market that would best enforce these regulations. Furthermore, in the course of illustrating the aforementioned fact, the author will attempt to define prostitution, establish the voluntary nature of industry participants, explore the costs of prostitution on different agents, and evaluate different economic models of the current and proposed prostitution market.
What is “prostitution”?
In most natural attempts to define terms, the dictionary is often the place to begin. Merriam -Webster dictionary defines prostitution as “the act or practice of engaging in promiscuous sexual relations especially for money” (2012). Superficially, this definition seems rather straight-forward. However, as noted in Ellis’ Studies in the Psychology of Sex, the act of performing sex deeds in exchange for fiscal returns “is done every day by women who become wives in order to gain a home and a livelihood” (1913).
Of course, Ellis’ claim will most likely anger numerous feminist and fundamentalists, but there are very convincing facts to support it. First, we must remind the reader that the notion that marriages legitimizes sexual activities between a couple is universal in almost all cultures – without such norms, how then, shall we maintain our species? Second, even in a developed country such as the United States, the Department of Labor reports that more than half of the total employed population is male. Meanwhile, the Bureau of Labor Statistics reports that in a married-family with children under 18 years old, 30.4% of them are in the situation where the father is the only one employed compared to the mere 6.9% in which the mother is the only one employed (2012). Clearly, (perhaps due to the burden of labor and raising a child) the employment situation is generally stacked against women. Hence, marriage is often a good means to secure financial security for women.
With such similar definitions for wife and whore, the paper by Edlund and Korn argues that prostitution is the “act of rendering, from the client’s point of view, non-reproductive sex against payment” (2001). Yet again, there are many married couples who may engage in sexual acts but are voluntarily child-free due to other factors such as the economy. In fact, a report by the US Division of Vital Statistics (2012) shows that the percentage of voluntary child-free woman rose approximately 2% every five years from 1982 – 1995.
For the purposes of this essay, “prostitution” will be defined as the act of performing sexual intercourse with no long- or medium-term obligations between the client and the prostitute in excess of any arranged monetary payment from the client for the particular sexual services provided by the prostitute. For example, if a child is born as a result of sexual intercourse, the client has no parental obligations; there is no need for the client to provide any additional financial support; no requirement to for the client to be loyal and true “in good times and in bad, in sickness and in health” (Catholic Wedding Help, 2012). In particular, this paper will focus on the prevalent woman prostitution industry serving heterosexual males.
Note that this definition does not diminish one’s obligation to the law (e.g. if a prostitute is murdered by a client, he is subject to regular legal and criminal proceedings). It also discriminates between other forms of sexual services such as show girls and strippers that do not necessarily involve sexual intercourse.
The Economics of the Prostitution Industry
It is important to analyze the current market and its implications. To do this in a systematic order, the author will utilize an economic model and attempt to analyze the cost and benefits of each agent.
Economic Model
In a report by Satterfield (1981), up to 90% of prostitutes are under the control of a pimp – a person responsible for facilitating and running the prostitution business. It can be argued that even though it is relatively easy for prostitutes to enter the industry, the real decision-making to exit the market rests with the pimp.
Unfortunately, statistics on the prostitution is rather inconsistent, often characterized by rather select and small sample. From a synthesis of data, it is found that the number of these pimps vary significantly depending on the city. In cities with a limited red-light district or cities where the industry is very closely related to illegal gangs as reported by Ruthford (2010), the entry and exit to the industry becomes difficult. Hence, the market becomes similar to a monopoly. Meanwhile, in bigger cities, the market becomes a monopolistic competition.
Monopolistic competition is characterized by the following:
1. Product differentiation – Each pimp will have different girls.
2. Many Firms – Big city, big market.
3. Free entry and exit – limited gangland violence.
4. Independent decision making
5. Agents have control in setting price (some market power).
6. Imperfect Information
Figure 1: Short-run Monopolistic Competition Model (Wikipedia, 2006)
In a short-run monopolistic competition, the quantity of prostitute supplied to the prostitution market would be at point QS while the price is at point PS in Figure 1. It is clearly seen, through the non-clearing market price and quantity that this arrangement is not allocative efficient (price is higher than marginal cost). Compared to a competitive market, there is a net loss of consumer and producer surplus.
Figure 2: Long-run Monopolistic Competition Model (Wikipedia, 2006)
In the long-run at equilibrium, the quantity will be at point QL and prices at PL as shown in Figure 2. The pimp will not be gaining any economic profit because the price only covers the average cost.
On another hand, a monopoly is characterized by the following:
1. High barriers to entry – gangland violence
2. Single seller – each gang normally “controls” an area which serves a specific market/ community
3. Ability to determine price
4. Lack of close substitute – only substitute for whore is wife which is not exactly a close substitute
![clip_image002[1]](http://lh3.ggpht.com/-msm8EvE_3W4/UN_xCheNgGI/AAAAAAAAArQ/KXpB48xFg8E/s1600-h/clip_image002%25255B1%25255D%25255B2%25255D.jpg "clip_image002[1]")
Figure 3: Monopoly Market Model (Wikipedia, 2006)
As clearly seen, the monopoly model will behave like the short-run monopolistic competition model. The quantity of prostitute supplied to the prostitution market would be at point QS while the price is at point PS in Figure 3. Sellers will limit quantity to raise the price at will. It is clearly seen, through the non-clearing market price and quantity that this arrangement is not allocative efficient (price is higher than marginal cost). Compared to a competitive market, there is a net loss of consumer and producer surplus.
Based on an article from The Economist (1998) which reported that Latvian prostitutes may earn up to 20 times more than the average wage, we can deduce that the majority of the prostitution industry operates under a monopoly model with gangland violence and multiple legal barriers to entry. In the next section, the author will attempt to justify this claim against another theory. For the purposes of evaluating the consequences of the current prostitution model, the author will focus on the outcome of the monopoly market model and dismiss the monopolistic competition model on grounds that it does not match with generally accepted empirical evidence.
Is the prostitution industry really run by pimps?
The relation between prostitutes and pimps has long been a controversial topic which is ultimately used to justify different sets of data used to support legalization/ decriminalization of the prostitution industry. Those supporting legalization/ decriminalization will often claim that prostitutes mostly work independently with limited abuse. Meanwhile, the opposition uses a different set of data that suggest relations between pimps, gangs, human trafficking, and street violence. Due to the large discrepancy between data, this section will first attempt to determine whether prostitution and gangland pimps are related.
As concluded from the model above, prostitution is a rather profiteering business with prices much higher than the market price. However, of that total price, who really benefits? To investigate this, we must determine how the revenue of the industry is distributed. Specifically, how do prostitutes and pimps interact? Is the quantity supply of “voluntary prostitutes” significant?
Having provided a preliminary explanation as to why the prices of prostitutes are so high despite its generally low-skill, low-capital requirements through the monopoly model, the author will now explore another explanation provided in a paper written by Edlund and Korn (2001).
In their paper, the prostitution is simply a matter of preference: does a woman want to be a wife, or does she want to be a whore? This ability for the prostitute to make a rational decision of her own suggests that prostitution is an easy entry-exit industry following a similar economic model of monopolistic competition described above where the principal suppliers are not necessarily pimps, but rational prostitutes. The argument hinges on the fact that “commercial sex” provided by prostitutes do not give the client the utility of kids. On the other hand, marriages are undertaken to transfer parental rights to the father. Because of the assumption that the utility of kids are positive, males are presumed to pay a significantly high cost to acquire a wife: diamond ring, dinner dates, medical care, tolerating her complaints, etc.
The paper concludes that because it is a woman’s choice to become a prostitute, her benefits must be higher or equal to her opportunity cost of marriage. Furthermore, it notes that even though men will pay prostitutes less than the price he pays to his wife, because prostitutes have more than one customer, her income must match or exceed the wife’s income from both the husband (colloquially known as a woman’s “maintenance cost”) and from any addition wage the wife obtains. Hence, the price of prostitution is much higher than the market labor price.
The investigation of Edlund and Korn’s paper begins by pitting a hypothesis against empirical evidence. First, if there is truly a free entry and exit to the industry, then in the long-run, the income of prostitutes should only be covering cost: the opportunity cost of being a wife which includes the payment from the husband and addition wages from work. However, in Edlund and Korn’s words, “male willingness to pay for reproductive sex is higher than for non-reproductive sex”. If working wives are earning more income from their wages, then the price paid by men to their wives for reproductive sex should be lower. Consequently, the price paid by each client for non-reproductive sex to prostitutes should be lower as well. This will force prostitutes to find more clients to cover their cost or quit the industry.
In a recent survey by the US Bureau of Labor Statistics (Catalyst, 2012), it is found that incomes of married women have been on the rise. For instance, of all married couples where both spouses are working, 17.8% of them are in situation where the wife earns more than the husband in 1987. This number rose to 28.9% in 2009. This increased income share of wives in the household suggests a decreased financial dependency of the wife to the husband, effectively reducing the cost the husband must pay to retain the wife and the benefits of parenting a child.
Figure 4: Gender Equality Index by Sub-index graph taken from the World Economic Forum Report Gender Gap Report 2012 (Hausmann, Tyson, Zahidi, 2012). The higher the score, the more equal it is. The subindex on Economic Participation and Opportunity is the one of interest because it weighs women to male income ratio quite heavily.
As shown in Figure 4, gender income equality trend is similar in all parts of the world. Globally, women, particularly married women, are becoming less dependent on males which reduce the cost of acquiring a wife from the male’s perspective.
Now, it would be useful to correlate this data with the price paid to prostitute. Unfortunately, due to the industry’s illicit nature and stigmatization, reliable statistics of prostitute wages over time is very difficult – if not impossible – to acquire. In a paper by Lillard (1995), it is reported that female prostitutes in LA in 1990 and 1991 had an “annual average total earnings of $23,845”. In a more recent report (2006) by Scott and Dedel, street prostitutes report charging approximately $100 per customer, with 3-5 customers a night. Prostitutes surveyed by Scott and Dedel (2006) “works six to eight hours a day, five to six days a week”. If “the typical sexual transaction takes around 10 minutes in a vehicle…and 25 minutes indoors”, then the following calculations will yield prostitute income:
Assumptions in maximum case:
work 52 week,6 days,8 hours per day, each customer 25 minutes,$100 for each customer
Annual Income in 2006 = income per customer x customer per hours x hours worked per day x days worked per week x weeks in a year
$599,040 From Bureau of Labor Statistics (2012): CPI in 1991 = 136.2 , CPI in 201.6.
Annual Income in 2006 in 1991 terms
= $599,040 x ( CPI1991 / CPI2006) = $404,708.57
More realistic assumption:
According to the paper, a prostitute gets “3 to 5” customers every night. If there are 52 work week, 6 work days per week, and income per customer is $100
Annual Income in 2006 = income per customers x # of customers per night x work days per week x # of weeks
= $156,000
Using the same CPI as above from Bureau of Labor Statistics (2012):
Annual Income in 2006 in 1991 terms
= $156,000 x ( CPI1991 / CPI2006) = $105,392.86
As shown from the calculations, the hypothesis that prices paid to a prostitute by each customer would fall as the prices of maintaining a wife decreases does not hold. Contrary, the prices of prostitution over time had in fact risen quite significantly in both nominal and real terms. Men are paying more for prostitution than the cost of “reproductive sex”.
Is this rise in price a result of prostitutes leaving the industry combined with the rise in opportunity cost due to increased wages for women? Contrary, evidence show that the population of prostitutes had risen in the US. In a paper published by Potterat in 1990, the estimated population of prostitute in the US in the 80’s is around 84,000 women. In a later paper by the Prostitutes’ Education Network in 2007, the estimates have risen to “over one million people in the US”.
In the long run, price of prostitution does not simply cover cost as suggested by the monopolistic model where there’s relatively free entry-exit to the industry – prostitutes, or someone in the prostitution industry is making a profit.
This sort of long-term, profit-making, price-setting characteristic could be easily explained by the monopolistic model described in Figure 3. Clearly, it is highly likely that the prostitution industry is closely tied to gang-style, monopolistic turf-like operations that can control quantity supplied and set price. In fact, from a non-economic analysis, this outcome does make sense.
Intuitively, as shown in Figure 5, if most of the world prohibits prostitution, how does one offer to sell sexual services? Who would have the means and network to advertise? Of course, in this day of the internet, some will argue that advertising is done through the internet, but in many countries it is still not possible. For example, despite the harsh internet censorship in Thailand, Thai sex-industry is booming with up to 270,000 prostitutes in the nation of approximately 60 million people (Department of Labor, 2008). Hence, it is undeniable that pimps play a major role in facilitating sexual transactions between a client and a prostitute.
Figure 5: Legalization of prostitution around the world. Red indicates that it is illegal; green indicates that it is legal and regulated; blue indicates that it is illegal and unregulated; grey indicates no data. (Procon, 2012)
Economic Model of Legal Prostitution Market
Generally, there are two main proposals regarding the legalization of the prostitution industry:
1. A restricted legal market in which the prostitution houses are either run by the government or by government licensed operators. Often, the proposal also restricts the business areas to specific “red light” districts.
2. A liberalized legal market where only certain industry standards must be upheld.
In both types of legal markets, the operator must adhere to some form of industry standard as well as some form of information disclosure. The difference between the two legal markets is its economic model and the extent of shifting that occurs in the supply and demand curve.
In the restricted legal market, the economic model will resemble Figure 3, the Monopoly market. This is because there will be severely restricted entry and exit to the industry as well as the operator’s ability to set the price by determining quantity supplied. Compared to the illegal pimp-run monopoly market, the shift in supply is dependent on the government’s decision as well as its ability to root out illegal prostitution houses. The demand curve shift will mostly depend on the government’s ability to enforce its restrictions on consumer qualities (over 21, etc) and public sentiment.
On the other hand, the liberalized legal market will closely resemble Figure 2, the Monopolistic market. Supply will increase and prices will drop to only cover cost when compared to the current illegal monopoly model.
Ethical/Philosophical Issues related to the Prostitution Industry
In order to determine how society should deal with prostitution, the author will explore the effects and implications (economical and ethical) of prostitution in the current illegal monopoly market on different parties both directly involved and uninvolved in the prostitution market. The author would then predict the extent of the effect if the prostitution market were either restricted legal or unrestricted legal.
Pimps and Prostitutes
Prostitution may seem like a relatively low-skilled high-income job to a number of women, but the lack of freedom once a woman enters the market brings about a number of atrocities.
First, a major concern is the consent of the women entering the industry. Is prostitution truly a choice? Perhaps, if prostitution is a choice then it is perhaps a positive as long as we can control gang activities. However, evidence suggests that most prostitutes enter the industry at an age of 14 – below the generally accepted age of adulthood. In Thailand, up to 40,000 of the total sex workers are children under age 18. Even in the United States, the Department of Justice (2008) estimates that there are approximately 600,000 underage children in the industry. Furthermore, data from the Prostitution Education Network (2012) suggests that up to 85% of prostitutes are “survivors of childhood incidences of sexual assault/ molestation by their relatives (forced incest) or others”. Clearly, a large number of prostitutes enter the market without consent, perhaps not even driven by economic interests.
Second problem with prostitution involves the violent treatment of prostitutes by pimps. In a particular case interview, all the women interviewed reported that they have been abused by their pimp. In another research, “prostitutes report being ‘horribly beaten’ by their pimps an average of 58 times a year “(CATW Fact book, 1996). Combined with the fact reported by Satterfield (1981), that 90% of prostitutes are aligned to a pimp; it is hard to imagine the number of women being physically abused.
Third concerns the association of the prostitution industry to other illegal activities such as murders and drug abuse. “More than half the women said that their pimps got them hooked on drugs. And all of them said that their pimps order them to commit other crimes” (CATW Factbook, 1996).
It is of the author’s opinion that the aforementioned vices of the industry clearly put the benefits of prostitution below other regular legal jobs even if the share of high compensation between the pimp and the prostitute is unknown. Because the true opportunity costs of injury are unclear, it is never a worthwhile endeavor to put yourself in harm’s way.
Client
One of the main reasons that the prostitution market is growing lies in the nature of the demand. Similar to movies, prostitution provides an escape for the client from the harsh realities of the world. As a result, the demand curve for prostitution becomes rather elastic. In times of economic hardship, despite the price, people would still seek the haven of sexual fantasy. Meanwhile, in times of economic prosperity, the love of sexual variety that is undeniable in a multitude of man drives the demand and price for prostitutes to go up.
However, it should be noted that numerous research have found that quite a significant portion of divorces stem from fidelity. Hence, customers are often times more willing to pay more for services in exchange for discreetness – further fueling the opaque industry. Also, the risk of sexually transmitted disease are playing a part in increasing the willingness of the client to pay more for “safer” sex from “clean” prostitutes.
In summary, the cost of the client is the possible consequences of getting caught by their spouses and the cost of sexually transmitted disease.
Other Externalities
First, as noted by Edlund and Korn (2001), prostitutes may be a competitor to wives. As men value children less or become unhappy with their sex life, there is a higher chance that he will seek a prostitute. If the payoff for prostitution becomes higher, then there is a high chance that more women will become prostitute. Note that a major obstacle that prevents them from doing so today is the social stigma associated to prostitution.
Second, it is evident that prostitution will increase the population of “fatherless children” and teenage pregnancy. A case-in-point is Thailand – a nation known for its notorious prostitution industry in which teenagers make up a large percentage of prostitutes – which has the world’s second highest number of unwanted teen pregnancy (Bangkok Post Online Reporters, 2011). It is highly likely that these two statistics is not a coincidence.
Hence, it is important to establish that the welfare of the child is an important externality that we must consider. Not only is it the “right” thing to do under many ingrained belief systems, but it has economic value as well. The actions of the child, depending on how he or she has been raised, have potential to produce monumental and expansive positive or negative externalities. For example, a recent research by the National Bureau of Economic Research summarized by Picker (2012) found that “child maltreatment roughly doubles the probability that an individual engages in many types of crime. This is true even if we compare twins, one of whom was maltreated when the other one was not”.
In a research publication by Urban Child Instutute, the outcomes of teenage parenting are as follow:
“According to the National Campaign to Prevent Teen Pregnancy, teen parenthood is linked to many negative consequences for mothers, fathers, and their children. Compared to those who delay childbearing, teen mothers are more likely to drop out of school, remain unmarried, and live in poverty. Their children are more likely to be born at low birth weight, grow up poor, live in single-parent households, experience abuse and neglect, and enter the child welfare system. Daughters of teen mothers are more likely to become teen parents themselves and sons of teen parents are more likely to be incarcerated.”
Market Regulation
In previous subsections, the author had spent much effort elaborating on the vices of prostitution. If the market were to be legalized, regardless of form, it is generally accepted that the described vices would be met with new regulations and verifiable public records that would solve or limit the ethical issues. The extent of negative effects of prostitution is assumed to be negatively correlated to the level of regulation enforcement. Currently, because prostitution is mostly illegal, there are no regulations on the prostitution industry at all other than a law that say it shouldn’t exist. Table 2 summarizes the aforemented ethical issues and some possible regulations.
| Problem | Regulation |
| Child abuse/non-consensual sex | Regulations regarding minimum age of prostitutes and clients as well as required prostitute and client background screening. |
| Pimp violence | Regulations preventing violence and fair channels for prostitutes to report them. |
| Involvement with illegal activities | Regulations preventing illegal activities and fair channels to report them. |
| STD | Regulations requiring preventive devices such as condom. |
| Broken Homes/fidelity | Disclosure of client list to deter fidelity. As well as client background checks. |
| Fatherless Children | Regulations requiring birth-control devices such as condom or birth-control pills. |
Table 2: Ethical issues involving the prostitution industry and some possible regulation to prevent them
It is important to note that these regulations will have unique effects on different demander groups. For example, if enforced, these regulations will strongly inhibit customers who prefer child sex, condom-free sex, customers who prefer discreetness, and customers involved with other illegal activities. Simply put, these regulations will not satisfy all pre-legalization demanders.
Regulation and Bureaucrats
It is undeniable, that the regulations in the previous subsections would alleviate some of the problems implied by the prostitution market. The extent of negative effects of prostitution is assumed to be negatively correlated to the level of regulation enforcement. However, the incentive to enforce these regulations is greatly affected by the type of legalization the government chooses to pursue.
In the regulated case, the government is directly responsible for enforcing these regulations in prostitution monopolies. If the bureaucrats in charge of the government-run prostitute houses have no stake in the operations of the house, then he would have no incentive to violate regulations. This is because the income of the house is relevant to his. Why would he risk the penalty when satisfying a client’s child sex fetishes does not increase his income? In fact, the bureaucrat would neither have an increased incentive to eliminate illegal prostitution nor an incentive to serve any legal customer – diminishing the quality of service and pushing customers away to illicit prostitute houses. Compared to the current market, this model will only be better if the current illegal market does not have an “ethical” (e.g. pimps that require condom use, keeps records of customers, etc) alternative for customers.
If the bureaucrat does have an incentive to serve customers, then the government-run prostitute houses will have better service but the bureaucrats may be more lax in their attempt to enforce regulations. According to IPSnews (Godoy, 2007), “International organizations fighting child sex tourism say Mexico is one of the leading hotspots of child sexual exploitation, along with Thailand, Cambodia, India, and Brazil”. Table 1 shows the Corruption Perception Index compiled by Transparency International ranking of these countries. It is clearly evident that bureaucrats in nations with child sexual exploitation and prostitution are also willing to commit wrong in exchange for financial gain. Prostitute houses that do not strictly follow regulations, as mentioned before, will satisfy a more diverse group of customers and consequently make more revenue – in which some of that money will go directly to the bureaucrats. Hence, the extent to which a restricted market of this form will help better the prostitution industry is likely to be minimal. If given a strong demand, public records may even be modified to hide lax regulation enforcement. On the positive note, the bureaucrats may have more incentive to root out illegal prostitute houses – the bureaucrat’s competitors – but it would not do much good because the government itself is turning a blind-eye to industry standards. For those who argue that increased accountability would deter officials, it should be noted that pimps who are operating businesses today are also faced with laws that will put them out of business if they are caught as well.
| Country | Corruption Perception Index (World Ranking) |
| Brazil | 4.3 (69th) |
| Cambodia | 2.2 (157th) |
| India | 3.6 (94th) |
| Mexico | 3.4 (105th) |
| Thailand | 3.7 (88th) |
Table 1: The Corruption Perception Index of nations with child prostitution compiled by Transparency International. The lease corrupt would score 10, while anything less than that is progressively more corrupt. The number is brackets is the ranking of that nation compared to others.
On the other hand, if we have a liberalized prostitution market, the situation would worsen. In nations that could not initially root out prostitution when it was illegal, it is of the author’s opinion that it would be even more difficult for them to enforce regulations governing legal prostitution. This is because once the market is liberalized, the number of prostitute houses would increase from the illegal levels. Scrutinizing a particular aspect of the business before shutting them down is much harder to perform than simply shutting them down. Moreover, the bureaucrats don’t really have any additional monetary incentive to regulate these businesses compared to pre-legalization. In simple terms, it is just simply more work for the bureaucrats. The market mechanism alone doesn’t stop officials who are bribed from continuing to accept bribes to continue turning a blind eye to regulations. In fact, with more businesses opening, this gives even more opportunities for officials to accept bribes. The price of bribery would be incurred in the cost of operation.
Conclusion
Prostitution in its current criminalized, pimp-operated monopoly form incurs heavy costs on prostitutes, clients, and society. Introducing a regulated and legalized prostitution market where officials have no stake on the income of the house would provide an ethical alternative to consumers.
However, only doing so will not eliminate the problems associated with the prostitution industry. Other measures that increase incentives to crack down illegal prostitution; incentives to deal with underlying causes of violence, fidelity, bribery; and incentives to improve sex education must also be introduced as well.
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File:long-run_equilibrium_of_the_firm_under_monopolistic_competition.JPG
Wikipedia. (2006, September 26). Short-run equilibrium of the firm under monopolistic competition
[Chart]. Retrieved from http://en.wikipedia.org/wiki/
File:Short-run_equilibrium_of_the_firm_under_monopolistic_competition.JPG
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