Chapter 6 - Berkman Center for Internet & Society

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William W. Fisher III Promises to Keep: Technology, Law, and the Future of Entertainment (Stanford University Press, August 2004)

Chapter 6: An Alternative Compensation System Imagine that I own a rocky promontory on the coast of Maine. A submerged reef extends from my land a half mile seaward. Mariners have trouble seeing the reef, especially at night or when it’s foggy. As a result, ships have been running aground on the reef for centuries. Even today, small pleasure craft lacking sophisticated electronic navigation equipment frequently hit it in the summer months. Some are seriously damaged, and a few are wrecked. One evening, after I’ve helped to extricate yet another smashed sailboat from the rocks, a friend suggests to me, “You know, you ought to build a lighthouse on the point. A bright light would warn boats to steer clear. If each boater paid you even a fraction of the benefit of the signal to him, you could make a tidy profit.” We discuss the possibility for a bit. All aspects of the plan make sense, except one: we can’t figure out how I could charge the beneficiaries of the lighthouse. My friend suggests making a deal with a nearby charter company, which rents boats to sailors unfamiliar with the local waters-who in turn run aground especially often. But such a contract would cover only a portion of the cost of the lighthouse. And once I made the light available to the company’s customers, I couldn’t prevent all other sailors from making use of it for free. In short, we can’t envision a profitable business model. Stymied, we abandon the idea. This parable, familiar to economists, illustrates what they refer to as the problem of “public goods.” They point out that a small number of socially valuable products and services have the following two related characteristics: First, they are “nonrivalrous.” In other words, enjoyment of them by one person does not prevent enjoyment of them by other persons. Second, they are “nonexcludable.” In other words, once they have been made available to one person, it is impossible or at least difficult to prevent other people from gaining access to them. Goods that share these features are likely to be produced at socially suboptimal levels. Why? Because potential suppliers of them, like me, recognize that they would not be able to recover from consumers the costs of producing them. Besides lighthouses, things that fall into this category include roads, national defense, inventions, and recorded entertainment.1 For centuries, governments have sought in various ways to counteract the danger that public goods will be underproduced. Looking back over the historical record, we can see that their efforts have taken five forms. First, they sometimes supply such goods themselves. Navigational aids and national defense are the clearest examples. Today, throughout the world, virtually all lighthouses and armies are supplied by governments, rather than by private parties. Some kinds of inventions are also generated in this way. In -1-

the United States, for example, much innovation in the fields of aerospace, agriculture, and medicine comes from government laboratories operated by the National Aeronautics and Space Administration, the Department of Agriculture, and the National Institutes of Health, respectively. Second, governments sometimes pay private actors to produce public goods. In the United States, the grants given to artists by the National Endowment for the Arts and the grants given to private universities and individual researchers by the National Institutes of Health exemplify this approach.2 Third, governments sometimes issue post-hoc prizes or rewards to persons and organizations that provide public goods. The lure of such rewards is intended to offset, in whole or in part, the disincentive to produce them in the first instance. Reward systems have been employed in various countries in various industrial contexts. For example, the British government offered a prize of £20,000 to the first person to invent a chronometer that would enable mariners to