The Harms of IP Theft

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By most accounts,
the Internet is revolutionary.
And while this
revolution appears to
provide significant
economic and social
benefits, it also imposes
costs. One such cost
is the rampant theft of
intellectual property.

Most agree that
something needs to be
done to improve the
enforcement of intellectual
property rights, not only in
the U.S., but across the globe. Given
the growing culture of the Internet
that everything online should be
“free,” however, finding an effective
enforcement mechanism that is politically
palatable is difficult.

Indeed, while many people pay lip
service to the notion that IP protection
is a good idea, many people nonetheless
simply don’t see the harm from
IP theft. Unlike the theft of ordinary
“physical” property, the theft of intellectual
property does not preclude its
enjoyment by other consumers.

In economic jargon, we say that IP
is “non-rivalrous” in consumption,
meaning, for example, that the consumption
of a musical work by one
person does not imply someone else
cannot listen to it. Contrast this circumstance
with the familiar case of
a cheese sandwich: If Tom eats it for
lunch, then Jimmy is precluded from
doing so.

This implies, inter alia, that the opportunity
cost of someone “stealing”
a bit of intellectual property is zero.
To put this idea in simpler terms, one
might say that, when a song is illegally
downloaded, the person stealing the
song gains a benefit, while no one is deprived
of listening to the song, and the
owner of the song, while cheated of a
payment of $1, say, would
otherwise have obtained
this $1 from the person who
downloaded it (i.e., the $1 is
simply a transfer).

If the redistribution argument
outlined above seems
“fishy,” that is because
it is fishy. Ignored in
this simple calculus is
the incentive — or lack
thereof — of those persons
who create, produce
and distribute
the intellectual property
being stolen. With
widespread theft of intellectual
one would expect less
intellectual property
to be produced, with a
consequent potential reduction in social
welfare. Indeed, this idea lies at the
foundation of copyright law — that is,
to promote the progress of useful Arts.

Yet, it is undeniable that those who
obtain “free” downloads of popular
fi lms or musical works do benefit directly
from this activity. They are not
compelled to pay for something that,
strictly speaking, has zero marginal
cost (in the short run). What is stolen
is consumed by users who value it.
While the producer is thereby cheated,
the nefarious downloader will benefit.
Can one say, in any precise way, that society
is worse off in this case?

The answer is “yes.” In particular,
we establish, using a dynamic general
equilibrium model of a very standard
type, that the extent of theft will in effect
act as a sort of tax on the production
of the good being stolen, and this
tax, in turn, will lead to distortions in
resource allocation that reduce the
welfare of society. As such, theft of intellectual
property, such as that facilitated
by rogue websites, is not just a
question of redistribution, it is a question
of overall societal well-being.

The Phoenix Center for Advanced
Legal and Economic Policy Studies is
an independent think tank in Washington,