Public Goods 1. Definition: Goods that do not get used up when consumed. In other words, one person’s consumption of a good doesn’t reduce anyone else’s.

Public Goods

1. Definition: Goods that do not get used up when consumed. In other words, one person’s consumption of a good doesn’t reduce anyone else’s potential consumption of the same good.

2. Examples: Ideas, television broadcasts, national defense.

3. Obviously, these are not physical items that get used up. Instead they are usually ideas and artistic expressions.

4. They are at the core of the Information Age Economy, since information is a public good.

Public Goods (cont.)

1. Some definitions of Public Goods claim that consumers can not be excluded from using them. Known as Non-excludability.

2. Some Public Goods, such as broadcasting, or national defense, appear to have this characteristic.

3. This misses the point. Any product for which consumers can not be excluded from using, e.g., apples, will give producers no incentive to produce.

4. The Demand for Public Goods is the vertical sum of individual demands.

Vertical Addition of Demands

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Titles and Reproductions

1. Book titles can be thought of as public goods, but the physical copies of a single book title are private goods that embody a public good.

2. Several questions arise: how many titles are optimal to publish? How many copies of each title would be optimal? How do competitive markets work? Monopolies? Finally, is it possible to produce public goods efficiently?

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In principle, a perfectly discriminating monopolist can produce efficient amount of

public good.

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1. Reproductions of a single Title are Private Goods2. Seller of the Reproductions can not appropriate the

entire potential value of the reproductions since he is not a perfect price discriminator.

3. With a single price for the reproductions, too few reproductions are produced (Q*-Qm). One component of lack or appropriation (area 7 in figure).

4. Consumers of the reproductions get surplus, which is another loss of appropriation for the reproduction seller. (1+2 in figure)

The Market for a Title

number of copies of a title

MC of printing

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34

56

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8

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Market for Titles

1. Because appropriability for reproductions of any title is imperfect, the sellers of titles can not achieve the vertical sum of demands (perfect discrimination demand in next figure).

2. Instead, the best the sellers can do is some distance below the vertical sum of individual demands (attainable demand curve in the next figure).

3. This leads to too few titles being produced relative to the ‘ideal’.

•

number of titles written

MC of writing another title

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Qm

Perf Discrimination Demand for titles

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Market Demand for Titles

Attainable Demand for titles

Q**

Copyright Tradeoffs

• This leads to two tradeoffs: – Under-consumption of individual titles.– Underproduction of titles.

• This same tradeoff exists in Copyright.• Copyright exists to give creators of ‘artistic’

works the ability to generate revenues.• The theory is that without copyright, competition

in selling reproductions of a title would drive the price down to the marginal cost of producing a reproduction. Competition would also drive the (economic) profits down to zero, leaving no money with which publishers can pay the author.

Copyright Tradeoffs

• It isn’t clear, however, that competition leaves no payment for the author.

• Arnold Plant argued that being first gave enough of a head start that sufficient profits could be earned to allow authors to receive optimal remuneration. (Ex. English authors in the US market).

• The lead from being first is, with current technology, unlikely to allow much profit.

Optimal Copyright

• The figure on the next page illustrates optimal duration of copyright.

• It contrasts the gains from lengthier copyright (the value of additional works created) against the harms (unnecessary loss of consumer surplus)

An Examplebooks last 10 years, have a value of $100 per year under competition, $60 per year under monopolyCopyright Length 0 1 2 3 4 5 6 7books written 100 106 112 118 124 130 136 142new books induced by copyright 100 6 5.4 4.86 4.374 3.9366 3.54294 3.18865value of books needing 0 year of protection 100,000 96,000 92,000 88,000 84,000 80,000 76,000 72,000value of books needing 1 year of protection 5,760 5,520 5,280 5,040 4,800 4,560 4,320value of books needing 2 year of protection 4,968 4,752 4,536 4,320 4,104 3,888value of books needing 3 year of protection 4,277 4,082 3,888 3,694 3,499value of books needing 4 year of protection 3,674 3,499 3,324 3,149value of books needing 5 year of protection 3,149 2,992 2,834value of books needing 6 year of protection 2,693 2,296value of books needing 7 year of protection 2,296

10%

net value 100,000 101,760 102,488 102,309 101,333 99,656 97,366 94,282

unnecessary dwl 4,000 4,240 4,456 4,650 4,825 4,983 5,380value of additional books 100,000 5,760 4,968 4,277 3,674 3,149 2,992 2,834

cumulative total value of books 100,000 105,760 110,728 115,005 118,679 121,828 124,820 127,654cumulative unn dwl 4,000 8,240 12,696 17,346 22,172 27,155 32,534net 100,000 101,760 102,488 102,309 101,333 99,656 97,665 95,120

Actual Copyright

• Life of the author plus 70 years

• ‘Work for hire’ movies, games?, 90 years.

• Is this too long?– Creative commons members say ‘yes.’– 17 economists say ‘yes.’– Mark Twain says ‘no’.

• In fact, no one knows if it is too long.

Fair Use

• There is in the law an attempt to balance the interests of copyright holders and those of users.

• Fair use is a defense to a claim of copyright infringement. It allows copying in instances when the copying appears not to be hurting the copyright owners revenues.

• Betamax Case said home videotaping was fair use, and thus home videotaping was allowed.

Fair Use

• 4 factors– Amount of the copyright product that is copied.– Nature of the Copyright product (commercial

versus academic or scholarly.– Nature of the use of the copied product– Impact on the revenues of the copyright holder.

• Last factor is the most important.

Potential Impacts of File-Sharing

• Substitution effect

• Sampling – Exposure impact

• Indirect appropriability

• Network effects

Potential Impacts of File-Sharing

• Substitution effect– Copy is a substitute for a purchase original.– After downloading, the individual does not

purchase since he already has possession of the product.

– This impact can only be negative.

Potential Impacts of File-Sharing

• Sampling – Exposure impact– Consumers download files in order to determine which

songs they like best. They then go and purchase the song they like. This allows them to get more value from every CD purchased.

– It has normally been assumed that this would increase sales.

– Because they get sated with a smaller number of CDs, it might decrease the number of CDs they purchase.

– Candy bar story.

– Example of cable television and hours viewing.

Indirect Appropriability

• Basic Idea: Producer Can Generate Revenues from those making unauthorized copies.

• Consumers who make duplicates are willing to pay more for originals since they get value from making duplicates.

• Producer can charge more for originals, thus indirectly appropriating some of the value in the copies.

Potential Impacts of File-Sharing

• Network effects– Exist when the value of a good to consumers increases

because other consumers use the same good—example of telephones.

– Might exist for songs or movies. Do consumers of these products care how many others consume the same product?

– Downloaders, therefore, by consuming the product, even if they do not purchase it, would increase the value to those who purchase, possibly increasing the revenues of the industry.

– That is the theory, at least.

Diagram of Copying Impact

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Copying Outlawed

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Diagram of Copying Impact

Impact of Piracy

• This idea of indirect appropriability has been examined in a least one market.

• It appears that unauthorized copying has benefited copyright owners in the case of photocopying.

Evidence on Price Discrimination and Indirect Appropriability

Libraries that: 1959 1983

Price Discriminate 3 59

Don’t Price Discriminate 35 21

Ratio of Book to Journal Expenditures, US Academic Libraries

1941 3.02 1961 3.19 1975 1.70

1944 3.41 1965 3.36 1977 1.54

1946 3.13 1968 3.67 1979 1.26

1950 3.01 1971 2.96 1981 1.13

1959 2.46 1973 1.96    

Continued

Dependent variable

Constant Cites Non-Profit Dummy

Age of Journal

R-square

Plib/PInd 1.29 .0065 [1.99]

.65 [4.14]

  .17 n=80

Plib/PInd 1.38 .0071 [2.14]

.578 [3.36]

-.16 [1.01]

.17

Application to Napster

• Can indirect appropriability work in Napster-like environment?

• Problem: large variability in the number of copies made from each original, and identifying at time of sale which originals are going to be duplicated.

• Large scale Napster copying would seem almost certainly to significantly harm copyright owners.

• Would work better if Napster had required upload credits to be earned before downloads were possible.

• Still, Napster is easier to control than Gnutella based systems.

Impact of Copying So Far

Figure 3: Albums Sold per capita

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Impact of Law Suits

Number of American users of Major File-Sharing Software [KaZaa, WinMX, BearShare, iMesh, Bitorrent, emule, Grokster] Source: comScore/MediaMetrix

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Law Suits Announced June 25

Law Suits Begin Sept 8

Reaction to Copying

• Shutting down Napster. Legal action against other networks.

• Threatening to prosecute users who make copyrighted materials available to others.

• ‘Spoofing’ and other technologies to make the trading in copyrighted goods more difficult.

Proposals for Alternative Systems

• Actions of the Record Industry seem rather draconian to some. An alternative, based on a compulsory license, has been proposed.

• The compulsory license would require copyright owners to allow anyone to make digital copies of their works.

• In return, a pot of money would be established to pay copyright owners for this right. The pot most likely would come from a tax on ancillary products, such as blank discs, stereo equipment, Internet Service Providers, and so forth. A copyright Board or Panel would determine the amount of these taxes, and who would pay.

Evaluating these Proposals

• Two basic questions that need to be faced in any such system.– How much revenue should be generated?– Who is to pay?– Who gets the revenue?

• Markets normally determine prices, and consumers vote with their dollars.

• How would a Board attempt to determine the correct number of titles to support, which titles to support, which products to tax, how much to tax them?

• How can we prevent ‘authors’ from gaming a system to increase their payouts?

Other Issues

• Digital Rights Management (DRM)– Copyright owner can imbed code into software

that will monitor use and charge accordingly. It can also prevent copying.

– Copyright owner can virtually costlessly collect revenues from users.

– It might be the most efficient mechanism since it approaches perfect price discrimination.

DRM

• This has led to a contentious debate among academics.– Question: Is this protection ‘too strong’? Too

much power to copyright owner?– Does it remove or kill Fair use ?– Does it eliminate free speech?– Does it reduce the creation of copyrighted

materials?