Economics of Information III: Consumption

The consumption side: how should we allocate information among consumers?

I’ve probably been too wordy in previous posts, and will try to keep this section brief.

Patents obviously are what create private property rights in information and allow it to be bought and sold. The problem with this is that prices serve as a rationing mechanism–only those willing to pay the price are allowed to use the information. The problem is that unless the information itself causes harm to others, additional use imposes no additional costs. In fact, in many cases additional use creates additional benefit.

Take a recent example from the news, which reports that the greatest thinning of the ozone layer in history occurred last year. The immediate cause of this problem is that as incomes grow in China and India, the demand for air conditioning grows as well. The Montreal Protocol on Ozone Depleting Compounds banned CFCs, but allowed in their place the use of HCFCs, which in terms of ozone depletion offer a 95% improvement on CFCs. Unfortunately, the demand for refrigerants in China and India in increasing by 35% per year, and the net impact is even more ozone depletion than prior to the ban. The fact is that alternatives to HCFCs exist, but they are too expensive for poor countries to afford, one reason being that they are patented, and royalties increase their price. While we would unquestionably be better off paying countries to use safer alternatives to HCFCs, we instead charge them for their use, with potentially catastrophic results. Industry shows little interest in developing safer refrigerants such as ammonia and CO2, because they offer little opportunity for profits.

Another example: Under the Convention on Biodiversity, countries essentially have property rights to their biodiversity. As a result, Indonesia was able to sell the exclusive right to the virus involved in a recent outbreak of avian flu to a private corporation. Previously, most countries had given virus samples to the WHO, but Indonesia was worried that the WHO would pass the sample on to private corporations that would invent vaccines too expensive for Indonesians to afford. As part of the deal when Indonesia sold the virus, Indonesians would have access to the vaccine. If a vaccine is patented, use is rationed to those who can afford it. This ensures a large pool of poor people unable to afford the vaccine and therefore susceptible to infection, dramatically increasingly the likelihood of a pandemic. Again, charging for information leads to the grossest sort of inefficiency.

Other examples with similarly dire results include charging royalties on existing AIDS medicines, or more hypothetical, inventing a clean, renewable, decentralized and carbon free alternative to fossil fuels then patenting it and charging royalties so high that poorer countries continue to burn coal, and global climates go haywire. The social cost of supplying existing information that protects or enhances public goods is negative and even downward sloping when there are threshold effects, while prices are positive. Even conventional economists agree that prices greater than marginal costs generate a dead-weight loss of economic surplus.