The Basic Economic Argument

When discuss the economic rationale of copyright, Professor Robert M. Hurt groups the various justifications offered in favor of copyrights under two head-ings: (1) those which are based on the rights of the creator of the protected object or on the obligation of society toward him and (2) those which are based on the promotion of the general well-being of society.⁸⁷ The first classification can be divided into three theories: (1) the natural property right of a person to the fruits of his creation, (2)the moral right to have his creation protected as an extension of his personality, and (3) his right to a reward for his contribution to society.⁸⁸ From the above discussion of the historic background of the copyright, one can find that the development of Anglo-American copyright scheme was irrelative with the first classification – nature right or moral right based rationales,⁸⁹ but associate with the second classification: promotion of the general well-being of society, which, as evaluated by Professor Hurt, is necessary supplement to the free market in promoting the best allocation of scarce resources according to the

87 See Robert M. Hurt & Robert M. Schuchman, The Economic Rationale of Copyright, 56

AM. ECON. REV. PAPERS & PROCEEDINGS 421, 421-22 (1966), available at http://www.

compilerpress.atfreeweb.com/Anno%20Hurt%20&%20Schuchman%20Econ%20Rationale

% 20Copyright.htm (last visited Aug. 27, 2007).

88 Id.

89 But see Wendy J. Gordon & Robert G. Bone, Copyright, in ENCYCLOPEDIA OF LAW AND

ECONOMICS § 1610, at 191 (Boudewijn Bouckaert & Gerrit De Geest eds., 1999), avail-able at http://encyclo.findlaw.com/1610book.pdf (last visited Aug. 21, 2007) (arguing that United States copyright law recently adopted the idea of moral right, though in a much more limited form).

priorities of human wants.⁹⁰

In the notions of economic analysis, the basic purpose of a property system is to ensure that resources are allocated to their highest valued use,⁹¹ in which can achieve the “allocative efficiency.”⁹² Thus, as a property right, copyright provides the proper degree of protection when it ensures that individuals will produce works of authorship if such production would represent the most highly valued use of their resources.⁹³ In terms of efficient resource allocation, it makes sense to produce copyrighted work as long as the value attributed to it by users exceeds the social cost of its production.⁹⁴

Copyright promotes optimal production, and thus economic efficiency, of copyrighted works by “[t]rad[ing] off the costs of limiting access to a work against the benefits of providing incentives to create the work in the first place.

Striking the correct balance between access and incentives is the central problem in copyright law. For copyright law to promote economic efficiency, its principal

90 Id. at 425.

91 Glynn S. Lunney, Jr., Reexamining Copyright’s Incentives-Access Paradigm, 49 VAND. L.

REV. 483, 579 (1996) [hereinafter Lunney, Incentives-Access Paradigm].

92 Allocative efficiency is typically reserved for considerations of whether an industry is

producing the “right” amount of a specific good or service. See JEFFEREY L. HARRISON, LAW AND ECONOMICS IN A NUTSHELL 29 (2d ed. 2000).

93 See Lunney, supra note 91, at 489. The most efficient allocation of resources is obtained

when markets are competitive; in other words when prices are determined by demand and supply and fully reflect the cost of producing a good, its opportunity costs, and society’s valuation for the good as well as other uses of the same resources. See ANDREW B. W HIN-STON, DALE O. STAHL &SOON-YONG CHOI, THE ECONOMICS OF ELECTRONIC COMMERCE

5-1 (1997), available at http://crec.mccombs.utexas.edu/works/ebook/ec05.pdf (last vis-ited Aug. 28, 2007).

94 When an input is used to produce one good, the “social cost” is the value placed on the

use of the input in the production of other goods. See HARRISON, supra note 92, at 29.

legal doctrines must, at least approximately, maximize the benefits from creating additional works minus both the losses from limiting access and the costs of ad-ministering copyright protection.”⁹⁵

The commonly implemented economic analysis of copyright is welfare eco-nomic,⁹⁶ which has two major streams:⁹⁷ the first one focuses on the welfare tradeoffs between the incentives created by property rights and the social costs of enforcing rights – both the costs of administering the system and the costs of los-ing access to information at its marginal cost of zero.⁹⁸ The second stream fo-cuses on the signaling effect of property rights – whereby consumers signal pro-ducers what innovations or information goods are most valuable. This argument focuses on private parties’ advantage in reaching efficient tradeoffs between in-centives and access using property-based contracts.⁹⁹ A central difference

95 See Landes & Posner, supra note 4, at 326.

96 Welfare economics explores how the decisions of many individuals and firms interact to

affect the well-being of individual. See COOTER & ULEN, supra note 1, at 39. Apply this concept to the Intellectual Property area, “individuals” referring to “users”, and “firms”

referring to “information providers”.

97 See Yochai Benkler, Intellectual Property and the Organization of Information

Produc-tion, 22 INT’L REV. L. & ECON. 81, 82 (2002).

98 This tradeoff is often seen as involving 1) static losses: in consumption of existing

infor-mation offered at an above-marginal cost price sufficient to compensate producers; 2) dy-namic gains: through incentives to invest in production; and 3) dydy-namic loss: added by the effects on second generation producers who use information as an input into their own productive enterprise. See id. This stream is rooted in the work of Benkler, supra note 97, at 85 nn.4 & 5 (citing Kenneth J. Arrow, Economic Welfare and the Allocation of Re-sources for Invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL FACTORS 609 (Richard R. Nelson ed. 1962), and WILLIAM D. NORDHAUS, INVENTION, GROWTH, AND WELFARE: A THEORETICAL TREATMENT OF TECHNOLOGICAL

CHANGE (1969)).

99 Benkler, supra note 97, at 83.

tween these two streams is that the first treats limitations on rights – like fair use – as inherent elements in fine tuning rights to achieve optimal protection, while the second justifies such limits only insofar as necessary to overcome mar-ket failures – primarily those based on transaction costs.¹⁰⁰

2.2.2 The Basic Economic Terminology and Conceptions