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The philosophy which assumes that the general public will not commit a crime because they observe the punishment of others is called:

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The correct answer is general deterrence.

General deterrence refers to a theory in criminology which claims that laws are reinforced and crimes are prevented when members of society are intimidated and afraid of the consequences of breaking the law. The knowledge of the consequences of crime being imprisonment, legal fees and hefty fines keep or deter people from committing crimes.
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