Twitter-squatters

In the early 90’s the term “cybersquatter” was coined for internet profiteers whose sole strategy was to register domains in the name of businesses and sell these domains to the associated businesses for big bucks. This has since become illegal following legislation passed in 1999, which granted trademark users the right to sue cybersquatters. Now in the late 2000’s, businesses are facing a similar hurdle and a new term is soon to be forged. Twittersquatters, perhaps?

The mystifying success of Twitter, a service that essentially sends text messages en masse that updates anyone on what you’re doing, has led to problems for businesses who didn’t register for free Twitter accounts and are now being represented by non-associated people with accounts in their names. Soon everything will be sorted out, new legislation will be passed, and that will be the end of the issue until the next networking site springs up that provides a similar opportunity for _______squatters.

But maybe instead of waiting for the next opportunity to arise, we could create a universal solution in the form of a tied-ownership clause for businesses.

Tied ownership is a property right used to distinguish ownership of fugitive property; property that is not stationary or intangible, i.e. wild animals, ideas, etc. Tied ownership is the granting of a right based on the associated entity. The other type of fugitive property right is the right of first possessor – what is currently being used in most cyber related areas. The right of first possessor is axiomatic; the right is defaulted to the first one to claim ownership. What would happen if property such as twitter, facebook, and myspace accounts were defaulted to the tied owner – the entity associated with that name.

Right now the rule of first possessor is used because transaction costs are low; it is easy to determine who is granted the right to the account (the first one to register that account). But we are seeing the same sort of deadweight loss that occurred with cybersquatters in the 90’s, in addition to negative externalities in the form of defamation.

The deadweight loss comes from zero-sum activities, essentially inefficiency caused by over-investment of time and energy by squatters to acquire first possession of the account for the purpose of transfer, rather than production and creation of surplus value.

Sarah Needleman, from the WSJ, reports that unauthorized Twitter-ers have been representing certain businesses and in some cases, advocating their competitors and/or making false claims about the company. Cases such as this cause inefficiency that could otherwise be avoided by implementing a rule to tied ownership.

Unfortunately, the rule of tied ownership is difficult to implement and would cause much confusion. For example, which company would get the Twitter account “Aldo”? Would it be Aldo Shoes? Or Aldo Software Systems? And who would be the governing body that would regulate such matters? Trademark registration could automatically register the associated Twitter account; with any other Twitter similar accounts having to be manually registered by the company. If the company chooses not to register Twitter accounts that represent their trademark (such as Aldo Shoes and AldoShoes) then they forfeit any right to sue the owners of those accounts. This would create large incentives for companies to take care of the registration to avoid any inefficiencies in the system.

Consuming Health Care

The Obama Administration released a report the other day claiming that Americans must start to reduce their consumption of health care in order to avoid soaring budget deficits and further damage to the economy.  In a time when the government is trying to increase consumption in every other sector, why is consumption on health care considered bad?

Insurance: Using insurance to pay for health care consumption create moral hazard and inefficiency.  Moral hazard occurs when people take greater liberties in risky behavior because they know they are protected by the insurance.  Insurance is based on a set of data based on behavioral patterns in the absence of insurance.  When these people get insurance, their behavior invariably changes because they are now responsible for less of the burden if injury should occur. 

But this doesn't only make people more risk-seeking, it also makes them medi-holics. Americans consume an enormous amount of health care services.  We go to the doctor when we have a cold, we get flu shots every year, it's over precautious.  There is a certain level of precaution that is considered optimal but we are surpassing that level and it results in inefficiency.  

I suppose the argument against this is that it's the market-determined level of health care consumption so it is not bad that we spend so much on health care.  To that I would argue that the optimal level of health care consumption can only be found when insurance is not offered.  Insurance effectively subsidizes health care costs so the level of actual consumption is higher than the optimal level; again, resulting in inefficiency.

Medicare: It is a fact that people aged 65 + spend more on health care than those under 65 and that those older people are on medicare. This means that the government's health care burden is enormous.  Medicare accounts for 14% of the federal budget and we can expect to see this number rise as the elderly population increases. Though people 65 + made up 13% of the population in 2002, they accounted for 36% of health care consumption. Further, the relative size of the aging population has increased greatly since 2002 and will continue to increase for the next 10 years.  This creates an even greater burden for the government, especially in this recessionary time, since many of these medicare recipients will drop any outside coverage and rely solely of medicare for health insurance.

Since health care expenditures are subsidized our consumption is far above the level it should be.  There is no easy solution and I think the Obama Administration is not unjustified to ask Americans to spend less on health care.  Further, since our consumption on health care is inefficient, reducing the amount spent on health care and transferring it to other sectors would not only create a more efficient economy but also a more efficient household allocation of resources.

Fast Facts

Health care consumption per person

1980: $1,106

2004: $6,280

Health care as a percentage of GDP

1980: 9%

2004: 16%

Thanks to http://www.ahrq.gov/research/ria19/expendria.pdf and http://facts.kff.org/ 

Economic Costs of Banning Books

Banning books is nearly a universal wrong, though many countries revel in the practice. These countries generally cannot be persuaded by the current arguments against banning books such as "It's just wrong" and "It inhibits freedom of choice." So I am going to try another route: what are the economic costs and benefits to banning books. I will first focus on the benefits of banning books and their economic rewards and then move on to the easier and more accurate analysis of what happens in the economy when books are banned.

Arguments for banning books are as follows

1. Reduce externalities caused by radical thought
   
2. True paternalism

To analyze the effect of externalities on a market we can refer to the graph below. The conventional example is a factory that has a negative externality of polution. The private cost is the cost structure that the firm faces without internalizing the societal harm caused by pollution. The social cost is the cost structure that the firm would face if the firm was made responsible for the fixing, reducing, or simply compensating the harm done to society. The difference between the social cost and the private cost is the cost of the externality.

Theoretically, countries that ban books would assume that the externality caused by such books would be so large as to push the cost curve (also known as supply) high enough so as to no longer have an intersection between demand and supply as shown below.

The second argument is true paternalism which is essentially the thought that the government knows better what is good for a person than does that person. This occurs in the US in the form of inalienable rights. A popular example is the market for human kidneys. It is illegal in the US to sell your kidney even though it belongs to you. It is a form of true paternalism in which the government believes that you will be better off keeping both of your kidneys than selling one of them. In the case of banning books, the government believes that the harm you will be caused by reading certain books is too high to risk and therefore, the government bans those books to prevent any harm.

The costs of banning books are much greater and varied.

1. Increased risk of book creation (private)
   
2. Restraint of trade (social)
   
3. Reduced potential surplus value from knowledge (social)
   

There is a certain risk involved when deciding to write a book. Economists call it the costs of creativity and they are partially determined by the expected profits of the book once it is published. Expected profits are a function of the payment schedule and a the probability of attaining each payment. If a government is banning books then they are essentially reducing expected profits by the probability that the book will be banned.

Example:

Assume that to write a book there is only one cost which is fixed at $20,000 and that there is only one profit outcome at $50,000. Therefore expected revenue = (1)(50,000) = $50,000. Multiplying by 1 stands for the probability that this outcome will occur which in this case is 100%. Expected costs is fixed at $20,000 so the writer will have positive profits of $30,000 and will write the book.

Now suppose the government starts banning books and the probability that a book will be banned is 75%. Therefore, the new expected revenue = (.35)(50,000)+(.75)(0) = $17,500. In this case the writer will not pursue writing the book because the expected revenue is less than expected costs.

The second cost of banning books is restraining trade by prohibiting voluntary transactions. This is simple to analyze; when voluntary transactions are quashed the market becomes inefficient because an excess is created, in this case, we would see an excess in demand.

Books are not like other commodities in that they can foster surplus value by aiding in the creation of ideas. When books are banned, we essentially take away potential surplus value that could have otherwise existed. This reduces social welfare. It is also seen that when opportunities for surplus value to be created is taken away from society, the economy is not able to grow at an optimal level.