Friday, April 07, 2006

Intellectual Property

An email from today:

I'm a Boston Public School teacher. I use your textbook to teach seniors Intro. to Econ. They love it. Thanks for your lucid writing!

My students have asked me what you think about music file-sharing, Napster etc. What should I tell them about your thoughts and those of economists in general? (I know a lot of ink has been spilled on this topic already, but I've never seen/read what you think.)

I am far from an expert on this topic, but here is how I (and many other economists) think about it.

The basic issue is one of intellectual property. From a purely static perspective, the marginal cost of one more person listening to a song is zero. As a result, it would be optimal for people to be able to share songs. The price would be driven to zero, resulting in the efficient allocation. However, from a dynamic perspective, we have to realize that if the price were zero, the artist may well not pay the fixed cost of producing the song. That is, the song might not have been written in the first place.

In a sense, the situation is one of natural monopoly. Because there is a fixed cost and zero marginal cost, average cost is declining over the whole range of output (which here is the number of listeners). Marginal cost pricing would put the firm (artist) out of business. Instead, we live with the static inefficiency of monopoly pricing. This means not allowing people to share music. Protecting intellectual property in this way leads to more intellectual property being created over time. Artists, like other people, respond to incentives.

The same issue arises in many other contexts, such as patent protection for pharmaceutical drugs. Without patents, inexpensive generic drugs would be available immediately after a drug is discovered, but fewer discoveries would take place. That is why the government grants patent protection for a period of time. The hard question is the optimal length of patent protection.

I view intellectual property as a key driving force of economic growth and higher living standards. (So does Paul Romer, as you can see in this lucid article.) As a result, I am inclined to give strong protection to intellectual property. But I have to acknowledge that this solution is second-best, given the inefficiencies inherent in monopoly pricing.