This article, published in BBC News, discusses the shutdown of ISOHunt, a website offering downloads of pirated materials. After losing a lawsuit by the MPAA, ISOHunt has agreed to close its doors and pay $110 million in damages to the association. Chris Dodd, president of the MPAA, calls this a “landmark lawsuit” and claims that it will help to prevent future exploitation of those working in creative industries by piracy websites. The ISOHunt story clearly does not stand alone: The issue of internet piracy and copyright infringement in the Information Age has been widely discussed.
In thinking about this issue, I couldn’t help consider the welfare costs of both internet piracy and its prevention in light of the Tullock chapter we read last week. Internet piracy, like theft, involves a transfer of surplus - with internet piracy producer surplus in the entertainment industry shrinks, while consumer surplus rises as movies, music, etc. are made available at no cost. Interestingly, though, this is probably not a pure transfer: Many consumers of pirated material would choose not to consume if they were required to pay, so the loss of revenues resulting from internet piracy are likely less than than the benefit derived by those consuming pirated materials. This means that consumer surplus will rise more than producer surplus will fall, and the social welfare effects of internet piracy could actually be positive.
What about the costs of prevention? While ISOHunt’s payment of damages to the MPAA may simply be seen as compensation for foregone revenues, such payments are not the only costs of prevention. Regulating internet piracy also involves expenditures of time and money locating piracy websites and pursuing legal action. These expenditures are unproductive and involve the diversion of resources that could be better utilized elsewhere. While internet piracy may actually increase social welfare, then, attempts to prevent it serve the opposite end. True to Tullock’s argument, the actual welfare costs of internet piracy may be more in attempts to prevent it than in its actual practice.
1 comment:
The analysis that some individuals would choose to not consume if they were required to pay is correct; however, it would be difficult to conclude that this leads to a situation in which the benefit derived by these individuals is greater than the costs to producers. A significant amount of information with regards to the market would be required to do so. One would need to consider how much demand shifts by diversion of consumers from the legal market, which in turn leads to a decrease in price for all consumers willing to pay. This decrease in demand also leads to a decrease in demand for complementary goods provided by the same suppliers such as sold advertising. At a certain point the incentive to supply at current costs no longer exists, which could lead to decreased quality in movies. It is not as simple as in the case of a price change due to taxes and subsidies. A conclusion in which welfare effects of piracy are positive would be difficult to support.
The same argument could be made for the theft of any good, that those that steal would not otherwise consume. Based upon existence of our rule or law, it is assumed that we are better off by agreeing to adhere to them than we are in not having such laws.
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