When are Intellectual Property Rights Useful?

Abstract

The economic analysis of property rights proceeds in two steps. The . rst distinguishes rival from nonrival goods. The second contrasts the welfare effects of property rights for these two types of goods. For rival goods, strong property rights lead to ef. cient outcomes. For nonrival goods, property rights involve the trade-off formalized by William Nordhaus (1969): Weak property rights lead to under-provision. Strong property rights create monopoly distortions. Recent discussions of copyright protection for recorded music have obscured the underlying economic issues. Interested. rms deny that music-sharing will reduce the incentives for rms to release new recordings. Artists and recording companies never acknowledge the ef-ciency costs of prices that far exceed marginal cost. It is left to economists with no stake in the outcome to clarify these issues. (Full disclosure: I have not consulted for anyone in the Napster case.) The stakes in the battle over the music business are small enough to get lost in rounding error for world GDP of about $30 trillion. However, this battle creates a “teachable moment” that could help frame policy in more important areas. Two lessons should emerge. First, to the extent that property rights are used to encourage the provision of nonrival goods, both sides of the Nordhaus trade-off matter for policy analysis. Second, there are other ways to provide incentives for the production of nonrival goods. If the. rst lesson has been obscured, the second has almost entirely escaped notice.