The Dilemma of the Internet

Inventions to improve communications are hardly limited to the modern age. But the rapid growth of electronic storage, access, and transmission of information highlights the dilemma of providing incentives for creating new information. Many new information technologies have large up-front or sunk costs and virtually zero marginal costs. With the low cost of electronic information systems like the Internet, it is technologically possible to make most information available to everyone, everywhere, at essentially zero marginal cost. Note that perfect competition cannot survive here because a price equal to zero marginal cost will yield zero revenues and therefore zero viable firms.

The economics of the new information economy highlights the conflict between efficiency and incentives. On the one hand, all information might be provided free-databases, economics textbooks, movies, performances. Free provision of information looks economically efficient because the price would be equal to the marginal cost, which is zero. But a zero price on intellectual property would reduce or destroy the profit incentives to produce new, data books, ann performances because creators would reap no return or profits from their creative activity, Society has struggled with this dilemma in the past. But with costs of reproduction and transmission .so much cheaper for electronic information than for traditional information, finding sensible public policies and enforcing intellectual propertyrights is becoming ever more difficult. Experts emphasize that intellectual property , rights are imperfect, especially across national borders.

Recently, the United States got into a trade dispute with China because that country was condoning the illegal copying of American movies, musical recordings, and software. Appropriability is increased by strengthening intellectual property rights.

It is also increased when the innovating firm has a large share of the product market. If Microsoft sells 95 percent of the operating systems for’ personal computers. it will naturally benefit substantially from research in that area. By contrast, small firms have , less ability to appropriate the value of their inventions, particularly if intellectual property rights are weak. If I invent a new programming language and cannot protect it with a patent or other means, I have . such a small share ‘of the computer market that I will probably not benefit at all.

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