Property, Intellectual
Property, and Free Riding

Traditional Commons
The word derives from
the unincorporated
land in and around
towns that everyone
was free to use.
Farmers could feed
their sheep, people
could cut wood, or
even live on it.

Traditional Commons
A pasture allows for a
certain amount of
grazing to occur each
year without the core
resource being
harmed.

Rivalry
Some commons are
rivalrous.
This means that an
individual’s use of the
common-pool resource
subtracts from other’s
use.

Rivalry
For example, excessive
grazing may cause the
pasture to erode and
eventually yield less
benefit to its users. I.e.,
there is a limit to the
amount of livestock the
commons can support.

Imagine a field of grass shared by 6 farmers, each with one cow…

A few facts: Each cow currently produces 20 liters of milk per day The carrying
capacity of the commons is 8 cows. For each cow above 8, the milk production
declines by 2 liters (due to overgrazing, there is less grass for each cow: less
grass, less milk!).
20 liters 20 liters
20 liters
20 liters
20 liters 20 liters
Total daily milk production for the commons: 120 liters

Do the farmers sit back and stay at 6 cows? Not if they are individual profit
maximizers (here simplified as milk production maximizers)
20 liters 20 liters
20 liters
20 liters
20 liters 20 liters
Total daily milk production for the commons: 120 liters (6 cows)

Do the farmers sit back and stay at 6 cows? Not if they are individual profit
maximizers (here simplified as milk production maximizers)
“I’ll get another cow”
40 liters 20 liters
20 liters
20 liters
20 liters 20 liters
Total daily milk production for the commons: 140 liters (7 cows)

We are now at the carrying capacity -- do they stop? No.
“Then I’ll get another cow too”
40 liters 40 liters
20 liters
20 liters
20 liters 20 liters
Total daily milk production for the commons: 160 liters (8 cows)

They are now at the maximum total milk production. But do they stop? No…
36 liters 36 liters
“I’ll get another cow”
18 liters
36 liters
18 liters 18 liters
Total daily milk production for the commons: 162 liters (9 cows)

32 liters 32 liters
16 liters
32 liters
16 liters 32 liters “My cow is now less productive, but 2
will improve my situation”
Total daily milk production for the commons: 160 liters (10 cows)

28 liters 28 liters
14 liters
28 liters
“I’ll get another cow”
28 liters 28 liters
Total daily milk production for the commons: 154 liters (11 cows)

“Well, everyone else is getting one,
24 liters 24 liters
so me too!”
24 liters
24 liters
24 liters 24 liters
Total daily milk production for the commons: 144 liters (12 cows)

“Well, I can still increase milk production
if I get a third cow”
30 liters 20 liters
20 liters
20 liters
20 liters 20 liters
Total daily milk production for the commons: 130 liters (10 cows)

This could go on for a while in a
vicious downward cycle…

Viewed graphically
200
Maximum total production for
commons: 162 liters/day
150
Total Milk Production per
Day for all the cows
combined
100
Milk Production (in liters)
50
0
0 2 4 6 8 10 12 14 16 18 20
Current level
-50
Gain (or Loss) to Yet individual farmers will
Individual Farmer for continue to add cows until
adding one cow there are 15 cows on the
commons
-100
Total Cows

Viewed graphically
200
Maximum total production for
commons: 162 liters/day
150
Total Milk Production per
Day for all the cows
combined loss in
100 output
Milk Production (in liters)
50
GAP
0
0 2 4 6 8 10 12 14 16 18 20
Socially Result of individual
-50 Optimal behavior
Gain (or Loss) to
Individual Farmer for
adding one cow
-100
Total Cows

And solutions?

Capturing Externalities
 If I overgraze a commons,
that imposes a cost on any
one else who might want to
use it.
 Property rights prevent the
creation of those negative
externalities by internalizing
the effects of the use of
real property.
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Property Rights
Logic: If I own the property, I won’t overgraze it.
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Real Property
Strong property rights solve the rivalry problem by making real
property exclusive, i.e., all others but the owner can be
prevented from enjoying the benefits of the property.
Keep Out!
22

Real Property
 Real property becomes a zero-
sum environment.
 If I use a piece of land, you
can’t use it.
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Squatters and Free Riders
Anyone who uses someone else’s property is
either a squatter or a free rider.
Free riding
undermines the
goals of the property
system. Property
owners won’t invest
if others can free
ride on that
investment.
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Some commons are
non-excludable --
there is no way to
keep people from
using them, even
though there is a
limited resource, and
overuse will
probably destroy the
resource.

Excludability
Many commons are
non-excludable.

Some commons are non-excludable and
also non-rivalrous. We call these “public
goods.” This means that one’s use of the
commons does not subtract from other’s
use.

What About Intellectual
Property?
Intellectual property in the US has
always been about creating incentives to
invent. Thomas Jefferson said:
“inventions cannot, in nature, be a
subject of property.” For him, the
question was whether the benefit of
encouraging innovation was “worth to
the public the embarrassment of an
exclusive patent.” On this long-standing
view, then, free-competition is the norm.
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Intellectual Property as Property
Congress, and the courts, increasing treat intellectual property
as a species of real property.
=
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Intellectual Property Protection
Governments set up laws that protect the creator’s right of exclusion:
Patents - How something works or the process of making it
Trade marks – Words or logo to indicate the origin of the products or
services
Designs – The distinctive look of the product or object
Copyright – Artistic or written works eg. Paintings, books, films,
music etc.
One product can be protected with many forms of IP
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Patents
Protect how something works
or how it is made
Must be new
Must not be obvious
Must have a useful application
Should be Better or Cheaper or Different
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Trade Marks
Distinguish ownership of a product or service
Name, Logo, Slogan, Domain Name, Shape,
Colour, Sound, Smell
Distinctive for the goods or services
which you are applying to register it for
Different from rival
Can not give false impression
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Registered designs
Distinctive look of object or item
Must be new
Must be unique
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Examples of registered designs
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Copyright
Prevents copying of artistic or written works eg. Paintings, books,
films, music etc.
Can be bought, sold or licensed
Lasts up to 70 years after the author’s death
Automatic right
Not registered
Cost is free
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Free Riding on Intellectual Property
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Metallica vs. Napster
Heavy metal band Metallica
discovered that a demo of their
song ‘I Disappear’ had been
circulating across the Napster
network, even before it was
released. This eventually led to
the song being played on
several radio stations across
America and brought to
Metallica’s attention that their
entire back catalogue of studio
material was also available. The
band responded in 2000 by
filing a lawsuit against the
service offered by Napster.
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Judge Frank H. Easterbrook
“Patents give a right to exclude, just as the law of trespass does with
real property. Intellectual property is intangible, but the right to
exclude is no different in principle from General Motors’ right to
exclude Ford from using its assembly line…Old rhetoric about
intellectual property equating to monopoly seemed to have vanished
[at the Supreme Court], replaced by a recognition that a right to
exclude in intellectual property is no different in principle from the
right to exclude in physical property…Except in the rarest case, we
should treat intellectual and physical property identically in the law --
which is where the broader currents are taking us.”
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Property Rights
The lessons from the economics
of property rights seems clear:
 Confer strong property rights
on intellectual property
creators
 This encourages them to
invest in identifying,
developing, and
commercializing new
inventions and managing the
inventions they have already
made.
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Misapplication of Property Rights?
 The drive to eliminate free riding is based on a fundamental
misapplication of the property rights framework.
 The economic theory is premised on the value of property
rights as tools for internalizing negative externalities, not
positive one.
 Enclosing the commons made a single owner responsible
for the consequences of overgrazing.
 Regulation of property internalizes costs of pollution.
 Zoning protects property from misuse.
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Positive Externalities
There is no need to fully
internalize benefits as there is
with harms.
If I put beautiful flowers on by
door step, I don’t capture the full
benefit of those flowers --
passers-by can enjoy them too.
Property law doesn’t give me a
right to track them down and
charge them for the privilege.
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Positive Externalities
The fact that my popular store
is located next to your obscure
one may drive traffic to your
store. I don’t have the right to
charge you for that service.
That seems to be the premise
that the modern shopping mall
is based on.
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Positive Externalities
The idea that the law should
find a way to compensate for
these positive externalities
seems preposterous to us.
Positive externalities are
everywhere. We couldn’t
internalize them all if we
wanted to. A beekeeper
keeps bees for the honey. An
externality is that trees in the
area are pollinated.
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Positive Externalities
Planting trees is a good example of
the disconnect between positive
and negative externalities.
Governments almost never restrict
the planting trees, an act that
generally confers only positive
externalities.
By contrast, governments often do
regulate the cutting of trees, even
on private property, because doing
so can have long-term negative
effects on the environment.
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Positive Externalities
One example where internalization
of positive externalities may be
important is in the case of the use
of a piece of property that requires
substantial fixed investment but is
nonexcludable.
Airports, bridges, roads all fit this
description.
In these cases, a use tax may
internalize some (but not all) of the
positive externalities.
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Postive Externalities
It is important to note that unlike
the case with negative
externalities, it is not necessary to
internalize all the positive
externalities.
The owners of toll roads don’t
capture the full social benefits of
their road to users. They just
need to capture enough of the
benefits to make their investment
worthwhile.
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Information is Different
Information can not be depleted, and thus is nonrivalrous.
Information is also non-excludable: “Information wants to be
free.”
My use of an idea doesn’t impose any direct cost on you, and
it is not something that others can be excluded from easily.
This makes it a “public good.”
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Information is Different
Copying information actually
multiplies the resource, not only in
making another physical copy, but
by spreading the idea and
therefore permitting others to use
and enjoy it. There are only
positive externalities!
Rather than a “tragedy,” an
information commons is a
“comedy” in which everyone
benefits.
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Information is Different
We shouldn’t be worried about free
riding in information goods.
It’s not that free riding won’t occur --
it’s ubiquitous.
Everyone can use E=mc2,
Shakespeare, or The Magic Flute
without compensating their
creators. Because use of those
works does no harm to their
creators, it doesn’t create a
negative externality.
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Information is Different
Information goods create only positive externalities, and there is no
worry about uncompensated positive externalities.
But artists still have to eat.
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Information is Different
The production of any good involves
fixed cost investments that must be
made before production, and
marginal costs that are incurred
each time an new unit is produced.
For information goods, marginal cost
of reproduction is near zero.
Some art costs more than other:
LOTR vs. a poem
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Information is Different
Intellectual Property rights
are justifiable only to the
extent that creators need to
recover their average fixed
costs. Thus, excludability is
justified if it creates value
for recovery of such costs.
Sometimes it isn’t even
necessary.
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Information is Different
“What changed, The Times said, was that many more readers started
coming to the site from search engines and links on other sites instead of
coming directly to NYTimes.com. These indirect readers, unable to get
access to articles behind the pay wall and less likely to pay subscription fees
than the more loyal direct users, were seen as opportunities for more page
views and increased advertising revenue.
"What wasn't anticipated was the explosion in how much of our traffic would
be generated by Google, by Yahoo and some others," Ms. Schiller said.
The Times's site has about 13 million unique visitors each month, according
to Nielsen/NetRatings, far more than any other newspaper site. Ms. Schiller
would not say how much increased Web traffic the paper expects by
eliminating the charges, or how much additional ad revenue the move was
expected to generate. “
(Rick Prelinger, via BoingBoing.net)
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Invention and creation are not zero-
sum activities
Applying property theory to intellectual property involves the
internalization not of negative externalities, but of positive ones --
benefits conferred on another.
It’s a win-win situation!
Internalizing positive externalities is not a proper goal of real property
rights and shouldn’t be for intellectual property either.
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