Chapter 7: Economics of prostitution
Peter G. Moﬀatt This chapter applies basic principles of economics to the market for prostitution services. Section 1 attempts to identify the position taken and the role played by this market within the commercial world, paying close attention to its interactions with other markets, and to the ways in which it is evolving over time. Section 2 draws some international comparisons of legal status and industry size, and then in Section 3, the chapter examines some theoretical models of prostitution, seeking among other things to explain how equilibrium earnings are so high in a profession with only rudimentary skill and capital requirements. The distinction between the ‘primary’ market of marriage and the ‘secondary’ market of prostitution plays a central role throughout the economic analysis. Within this framework, particular attention is paid to the concepts of opportunity cost, compensating wage diﬀerentials, price discrimination, asymmetric information and welfare considerations. In Section 4, the chapter moves on to examine the empirical evidence relating to prostitution, focusing on an econometric model of the price of sexual services. Several economic concepts emerge in this empirical section, including age–earnings proﬁles, strategic behaviour, consumer surplus and sunk costs. Section 5 examines the issue from a policy perspective, describing and evaluating various models of legalization. Section 6 concludes the chapter. 1 Introduction The prostitution industry is huge and operates in some form, either legally or illegally, in every corner of the world. The sheer size of this largely untaxed market makes it of considerable...
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