This article offers an economic analysis of the piracy that takes place off the Somali coast. This piracy has received a lot of media attention over the past few years, and understandably so as the pirates seem to be increasing the number of ships they take over and their ransoms have increased as well. From 2005 to 2009, the typical ransom was increased by 100 times. This escalating ransom is a form of price discovery on the part of the pirates. It may be asked why shipping companies put up with these problems, but it’s actually cheaper for them to pay the ransom than to lose the ship and the military will not always get involved. Most of these pirates are former fishermen who have decided to give up fishing for piracy because of the money. Many in Somalia make about $600 a year, but a pirate can make $10,000 by taking over a single ship. That may not be much to Jack Sparrow, but it’s certainly more than a typical fisherman in Somalia makes!

Source: Wired