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Property, Intellectual Property, and Free Riding
Traditional Commons
The word derives from the unincorporated land in and around towns that everyone was free to use.
Farmers could feed their sheep, people could cut wood, or even live on it.
Traditional Commons
A pasture allows for a
certain amount of
grazing to occur each
year without the core
resource being
harmed.
Rivalry
Some commons are
rivalrous.
This means that an
individual’s use of the
common-pool resource
subtracts from other’s
use.
Rivalry
For example, excessive
grazing may cause the
pasture to erode and
eventually yield less
benefit to its users. I.e.,
there is a limit to the
amount of livestock the
commons can support.
Imagine a field of grass shared by 6 farmers, each with one cow…
A few facts: Each cow currently produces 20 liters of milk per day The carrying capacity of the commons is 8 cows. For each cow above 8, the milk production declines by 2 liters (due to overgrazing, there is less grass for each cow: less grass, less milk!).
20 liters 20 liters
20 liters
20 liters20 liters
20 liters
Total daily milk production for the commons: 120 liters
Do the farmers sit back and stay at 6 cows? Not if they are individual profit maximizers (here simplified as milk production maximizers)
20 liters 20 liters
20 liters
20 liters20 liters
20 liters
Total daily milk production for the commons: 120 liters (6 cows)
Do the farmers sit back and stay at 6 cows? Not if they are individual profit maximizers (here simplified as milk production maximizers)
20 liters
20 liters
20 liters20 liters
20 liters
Total daily milk production for the commons: 140 liters (7 cows)
40 liters
“I’ll get another cow”
We are now at the carrying capacity -- do they stop? No.
20 liters
20 liters20 liters
20 liters
Total daily milk production for the commons: 160 liters (8 cows)
40 liters 40 liters
“Then I’ll get another cow too”
They are now at the maximum total milk production. But do they stop? No…
18 liters18 liters
18 liters
Total daily milk production for the commons: 162 liters (9 cows)
36 liters 36 liters
“I’ll get another cow”
36 liters
32 liters16 liters
16 liters
Total daily milk production for the commons: 160 liters (10 cows)
32 liters 32 liters
32 liters
“My cow is now less productive, but 2 will improve my situation”
28 liters
14 liters
Total daily milk production for the commons: 154 liters (11 cows)
28 liters 28 liters
28 liters
“I’ll get another cow” 28 liters
24 liters
Total daily milk production for the commons: 144 liters (12 cows)
24 liters 24 liters
24 liters
24 liters
“Well, everyone else is getting one, so me too!”
24 liters
20 liters
Total daily milk production for the commons: 130 liters (10 cows)
30 liters 20 liters
“Well, I can still increase milk production if I get a third cow”
20 liters
20 liters
20 liters
This could go on for a while in a vicious downward cycle…
-100
-50
0
50
100
150
200
0 2 4 6 8 10 12 14 16 18 20
Total Cows
Milk
Pro
du
cti
on
(in
lite
rs)
Viewed graphically
Maximum total production for commons: 162 liters/day
Yet individual farmers will continue to add cows until there are 15 cows on the
commons
Current level
Gain (or Loss) to Individual Farmer for
adding one cow
Total Milk Production per Day for all the cows
combined
-100
-50
0
50
100
150
200
0 2 4 6 8 10 12 14 16 18 20
Total Cows
Milk
Pro
du
cti
on
(in
lite
rs)
Viewed graphically
Maximum total production for commons: 162 liters/day
Gain (or Loss) to Individual Farmer for
adding one cow
Total Milk Production per Day for all the cows
combined
GAP
Socially Optimal
Result of individual behavior
loss inoutput
And solutions?
20
Capturing Externalities
If I overgraze a commons, that imposes a cost on any one else who might want to use it.
Property rights prevent the creation of those negative externalities by internalizing the effects of the use of real property.
21
Property Rights
Logic: If I own the property, I won’t overgraze it.
22
Real Property
Strong property rights solve the rivalry problem by making real
property exclusive, i.e., all others but the owner can be
prevented from enjoying the benefits of the property.
Keep Out!
23
Real Property
Real property becomes a zero-
sum environment. If I use a piece of land, you
can’t use it.
24
Squatters and Free Riders
Anyone who uses someone else’s property is
either a squatter or a free rider.
Free riding undermines the goals of the property system. Property owners won’t invest if others can free ride on that investment.
Some commons are non-excludable -- there is no way to keep people from using them, even though there is a limited resource, and overuse will probably destroy the resource.
Excludability
Many commons are
non-excludable.
Some commons are non-excludable and also non-rivalrous. We call these “public goods.” This means that one’s use of the commons does not subtract from other’s use.
34
What About Intellectual Property?
Intellectual property in the US has
always been about creating incentives to
invent. Thomas Jefferson said:
“inventions cannot, in nature, be a
subject of property.” For him, the
question was whether the benefit of
encouraging innovation was “worth to
the public the embarrassment of an
exclusive patent.” On this long-standing
view, then, free-competition is the norm.
35
Intellectual Property as Property
Congress, and the courts, increasing treat intellectual property
as a species of real property.
=
36
Intellectual Property Protection
Governments set up laws that protect the creator’s right of exclusion:
Patents - How something works or the process of making it
Trade marks – Words or logo to indicate the origin of the products or
services
Designs – The distinctive look of the product or object
Copyright – Artistic or written works eg. Paintings, books, films,
music etc.
One product can be protected with many forms of IP
37
Patents
Protect how something works
or how it is made
Must be new
Must not be obvious
Must have a useful application
Should be Better or Cheaper or Different
38
Trade Marks
Distinguish ownership of a product or service
Name, Logo, Slogan, Domain Name, Shape,
Colour, Sound, Smell
Distinctive for the goods or services
which you are applying to register it for
Different from rival
Can not give false impression
39
Registered designs
Distinctive look of object or item
Must be new
Must be unique
40
Examples of registered designs
41
Copyright
Prevents copying of artistic or written works eg. Paintings, books,
films, music etc.
Can be bought, sold or licensed
Lasts up to 70 years after the author’s death
Automatic right
Not registered
Cost is free
42
Free Riding on Intellectual Property
43
Metallica vs. Napster
Heavy metal band Metallica discovered that a demo of their song ‘I Disappear’ had been circulating across the Napster network, even before it was released. This eventually led to the song being played on several radio stations across America and brought to Metallica’s attention that their entire back catalogue of studio material was also available. The band responded in 2000 by filing a lawsuit against the service offered by Napster.
44
Judge Frank H. Easterbrook
“Patents give a right to exclude, just as the law of trespass does with
real property. Intellectual property is intangible, but the right to
exclude is no different in principle from General Motors’ right to
exclude Ford from using its assembly line…Old rhetoric about
intellectual property equating to monopoly seemed to have vanished
[at the Supreme Court], replaced by a recognition that a right to
exclude in intellectual property is no different in principle from the
right to exclude in physical property…Except in the rarest case, we
should treat intellectual and physical property identically in the law --
which is where the broader currents are taking us.”
45
Property Rights
The lessons from the economics
of property rights seems clear: Confer strong property rights
on intellectual property creators
This encourages them to invest in identifying, developing, and commercializing new inventions and managing the inventions they have already made.
46
Misapplication of Property Rights?
The drive to eliminate free riding is based on a fundamental
misapplication of the property rights framework.
The economic theory is premised on the value of property
rights as tools for internalizing negative externalities, not
positive one. Enclosing the commons made a single owner responsible
for the consequences of overgrazing. Regulation of property internalizes costs of pollution. Zoning protects property from misuse.
47
Positive Externalities
There is no need to fully
internalize benefits as there is
with harms.
If I put beautiful flowers on by
door step, I don’t capture the full
benefit of those flowers --
passers-by can enjoy them too.
Property law doesn’t give me a
right to track them down and
charge them for the privilege.
48
Positive Externalities
The fact that my popular store is
located next to your obscure one
may drive traffic to your store. I
don’t have the right to charge you
for that service.
That seems to be the premise
that the modern shopping mall is
based on.
49
Positive Externalities
The idea that the law should find a
way to compensate for these
positive externalities seems
preposterous to us. Positive
externalities are everywhere. We
couldn’t internalize them all if we
wanted to. A beekeeper keeps
bees for the honey. An externality
is that trees in the area are
pollinated.
50
Positive Externalities
Planting trees is a good example of the
disconnect between positive and
negative externalities.
Governments almost never restrict the
planting trees, an act that generally
confers only positive externalities.
By contrast, governments often do
regulate the cutting of trees, even on
private property, because doing so can
have long-term negative effects on the
environment.
51
Positive Externalities
One example where internalization
of positive externalities may be
important is in the case of the use
of a piece of property that requires
substantial fixed investment but is
nonexcludable.
Airports, bridges, roads all fit this
description.
In these cases, a use tax may
internalize some (but not all) of the
positive externalities.
52
Postive Externalities
It is important to note that unlike
the case with negative
externalities, it is not necessary to
internalize all the positive
externalities.
The owners of toll roads don’t
capture the full social benefits of
their road to users. They just
need to capture enough of the
benefits to make their investment
worthwhile.
53
Information is Different
Information can not be depleted, and thus is nonrivalrous.
Information is also non-excludable: “Information wants to be free.”
My use of an idea doesn’t impose any direct cost on you, and it is
not something that others can be excluded from easily.
This makes it a “public good.”
54
Information is Different
Copying information actually
multiplies the resource, not only in
making another physical copy, but
by spreading the idea and therefore
permitting others to use and enjoy
it. There are only positive
externalities!
Rather than a “tragedy,” an
information commons is a “comedy”
in which everyone benefits.
55
Information is Different
We shouldn’t be worried about free
riding in information goods.
It’s not that free riding won’t occur --
it’s ubiquitous.
Everyone can use E=mc2,
Shakespeare, or The Magic Flute
without compensating their creators.
Because use of those works does no
harm to their creators, it doesn’t
create a negative externality.
56
Information is Different
Information goods create only positive externalities, and there is no
worry about uncompensated positive externalities.
But artists still have to eat.
57
Information is Different
The production of any good involves
fixed cost investments that must be
made before production, and
marginal costs that are incurred each
time an new unit is produced.
For information goods, marginal cost
of reproduction is near zero.
Some art costs more than other:
LOTR vs. a poem
58
Information is Different
Intellectual Property rights
are justifiable only to the
extent that creators need to
recover their average fixed
costs. Thus, excludability is
justified if it creates value
for recovery of such costs.
Sometimes it isn’t even
necessary.
59
Information is Different
“What changed, The Times said, was that many more readers started
coming to the site from search engines and links on other sites instead of
coming directly to NYTimes.com. These indirect readers, unable to get
access to articles behind the pay wall and less likely to pay subscription fees
than the more loyal direct users, were seen as opportunities for more page
views and increased advertising revenue.
"What wasn't anticipated was the explosion in how much of our traffic would
be generated by Google, by Yahoo and some others," Ms. Schiller said.
The Times's site has about 13 million unique visitors each month, according
to Nielsen/NetRatings, far more than any other newspaper site. Ms. Schiller
would not say how much increased Web traffic the paper expects by
eliminating the charges, or how much additional ad revenue the move was
expected to generate. “
(Rick Prelinger, via BoingBoing.net)
60
Applying property theory to intellectual property involves the
internalization not of negative externalities, but of positive ones --
benefits conferred on another.
Internalizing positive externalities is not a proper goal of real property
rights and shouldn’t be for intellectual property either.
Invention and creation are not zero-sum activities
It’s a win-win situation!