property, intellectual property, and free riding

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


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


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


36 liters 36 liters

“I’ll get another cow”

36 liters

32 liters16 liters

16 liters


32 liters 32 liters

32 liters

“My cow is now less productive, but 2 will improve my situation”

28 liters

14 liters


28 liters 28 liters

28 liters

“I’ll get another cow” 28 liters

24 liters


24 liters 24 liters

24 liters

24 liters

“Well, everyone else is getting one, so me too!”

24 liters

20 liters


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


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


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


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


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


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


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 goods create only positive externalities, and there is no

worry about uncompensated positive externalities.

But artists still have to eat.

57


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


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


“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!

property, intellectual property, and free riding

Documents

liters of milk

no36 liters

liters32 liters16 liters

output milk production

milk production declines

maximum total milk production

total cows

traditional commons