Intellectual Property for CS Students: Economics of Intellectual Property






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What is the economic basis for Intellectual Property?

The ideas of property and scarcity are at the foundation of modern economics. At its most basic level, the idea of property means that the person who owns the land, item, or object in question has the exclusive right to decide what is done with that property. It is this right to possess a thing, and the ability to sell this right to others who would value it more highly, that makes economics work. Usually the owner's must be exclusive because normal, concrete things are rival goods, which means that if one person is using the item, other people cannot use it and gain the full advantage of it. You and I are rivals competing for the benefit of the property. Because there is not enough property for all of us to have all that we want, there is a scarcity—more people want the property than can get it. If I buy a certain piece of land, that means that you cannot, so whoever is willing and able to pay more for the land will get it and the other will have no legal rights to use it. Because of the rival and exclusive nature of concrete goods, people have an incentive to produce some kinds of goods and trade them for other kinds of goods that they need, or to earn wages or money that they then trade for rival goods.

However, not every economic transaction is in concrete goods. Many of the most valuable things today are not concrete items but are in fact ideas, inventions, and artistic or scientific works that can be replicated with ease and with very little cost. The oft-repeated saying that we have entered the "Information Age" is a recognition that it is often these non-concrete goods that have the most value to people and to companies today. In economic terminology, these goods are nonrival, because once they have been created, everyone can enjoy the benefit of the goods equally. For instance, once a book is produced, it can be copied an infinite number of times for a cost far smaller than the cost of producing the text in the first place, and both you and I can enjoy the benefit of the good. With the proliferation of digital media, replication of information has become so cheap that is approaches being free, and easy sharing of information on the Internet means that maintaining exclusive control over information is very difficult. This means that there is no scarcity of the good and that whoever wants it can have it. We are no longer rivals competing for the benefit of the good - we can both win.

This presents an economic problem. Our economy depends on giving people incentives to produce things. The incentive comes from the need to create rival goods in order to trade them for other rival goods a person might need that other people create. For instance, if the rival good you produce is corn, you trade corn for money and then trade the money for the other things you need, such as clothing. Time and services are also rival goods; if you are, for instance, a network administrator, you trade your time and expertise (they are rival goods because you only have so much time to work) for money with which to buy the things you need. With nonrival goods, however, once the intellectual good (such as a song or book) is produced anyone can enjoy the benefit of it without necessarily paying for it. This causes problems with the idea of economic incentives because there is no scarcity when dealing with nonrival goods, and therefore people are unlikely to trade scarce rival goods to get a nonrival good.

In order to create an incentive for people to produce informational goods, lawmakers introduced the concept of intellectual property. By giving someone an exclusive right to their intellectual creations and any copies of those creations, we create an artificial scarcity of the good that effectively turns it from a nonrival good into a rival good. If I patent a new, cheaper process for producing a good, and you want to use it, you will have to pay me for it rather than just going ahead and using it anyway. The goal is to make sure that I have an incentive to keep coming up with better ideas for producing goods. The concept of intellectual property is merely a device for turning something that by its nature is not property because it is not exclusive into something that is exclusive and which therefore has the characteristics of property.