VERSION>02 - The Economics of the Commons

`The Enclosure Movement` - the process of fencing off commons (primarily began with land, later water, forests etc got added to the ever hungrylist) and bringing in regimes of complicated property rights (private, state, corporate through grab, franchise, lease etc) have been going on fora very long time.

Some bright economists looked into a small tract of these commons in England (around 16th - 19thC) and generated a popular theory called the `TheTragedy of the Commons`. The argument is simple. The commons where either underutilised or overutilised and thus could not be taken care of. The enclosures worked because it allowed for incentives to make things productive.

This argument. is now gathering momentum around the internet and the knowledge industry.

I am enclosing an article by an `Nobel` economist who evokes the tragedy of the commons to argue a business model for the net. His conclusion andhis arguments seems to be in two different direction. interesting read.
cheers
Jeebesh

The Tragedy Of The Commons
Daniel McFadden, Forbes ASAP, 09.10.01
http://www.forbes.com/asap/2001/0910/061_2.html

Immigrants to New England in the 17th century formed villages in whichthey had privately owned homesteads and gardens, but they also set aside community-owned pastures, called commons, where all of the villagers' livestock could graze. Settlers had an incentive to avoid overuse oftheir private lands, so they would remain productive in the future. However,this self-interested stewardship of private lands did not extend to the commons.
As a result, the commons were overgrazed and degenerated to the pointthat they were no longer able to support the villagers' cattle. This failureof private incentives to provide adequate maintenance of public resourcesis known to economists as "the tragedy of the commons."
Contemporary society has a number of current examples of the tragedyof the commons: the depletion of fish stocks in international waters, congestionon urban highways, and the rise of resistant diseases due to careless useof antibiotics. However, the commons that is likely to have the greatestimpact on our lives in the new century is the digital commons, the information available on the Internet through the portals that provide access. The problem with digital information is the mirror image of the originalgrazing commons: Information is costly to generate and organize, but its valueto individual consumers is too dispersed and small to establish an effective market. The information that is provided is inadequately catalogued and organized. Furthermore, the Internet tends to fill with low-value information: The products that have high commercial value are marketed through revenue-producing channels, and the Internet becomes inundatedwith products that cannot command these values. Self-published books and music are cases in point.
Management of the digital commons is perhaps the most critical issueof market design that our society faces. Four major models exist for howsuch a market can be organized. In the first model, the information that consumers seek is bundled with advertisements that companies are willing to purchase.
In this model, the Internet works like magazines or supermarket newspapers.
Advertisers pay the costs of supply, and the price to consumers is zero, sort of, except for the implicit cost of screening out banner ads. This isthe business model that the Internet portals adopted in the mid-'90s. Self-generated advertising sustained the model for a few years, but the bursting of the dot-com bubble suggests that it may be a long time beforeit happens again.
A second model ties information content and organization to Internet access.
In this model, your ISP account includes a monthly fee for content, a portal, and personal services, with competition among access providers assuringthe consumer of attractive services. Market operation would be analogousto that for cable TV, with subscribers offered packages that would access different channels of information. The flaw in this model is that your ISP hasthe same dearth of incentives to deliver comprehensive information services thatyour HMO has to provide you with comprehensive health care. To assure good delivery of services to customers would take a market with many morechoices than are available.

The third model considers Internet information and organization a private good, owned by a monopolist (read: Microsoft), which has a direct incentive to provide and charge for the information that consumers value. Thisis likely to be an expensive solution for consumers, but it may be a more practical and stable way to provide essential information than the earlier alternatives.
The fourth model channels the supply of Internet information througha nonprofit corporation, like the Public Broadcasting System, or througha regulated monopoly, like electricity generators operating with the oversight of the Federal Energy Regulatory Commission.
The free-spirited Internet user may bridle at the market models in which consumers pay for content either through an ISP or monopoly control of information. Nevertheless, the imperatives of survival are likely topush the digital information business in one of these directions, with significant restrictions on the breadth of information available, and costs to consumers that are likely to be occasionally large and always irritating.
The PBS model is probably a nonstarter because few would want to haveany quasi-governmental organization controlling information, and financing PBS-like organizations is itself a problem that invites political mischief.

As for the virtues of regulation, history is fraught with examples that should dissuade anyone from going down that path. The advertising-supported business model is unlikely to attract venture capital for some yearsto come.

Thus, your fate is likely to be determined by the forthcoming battlebetween ISP-based value-added services such as AOL and information channeledthrough the Microsoft juggernaut and bundled into the license fee for your operating system. All indications are that the legal system will follow up the demolition of Napster with rulings that extend intellectual propertyrights down every path that electronic ingenuity can devise to return revenuesto providers.

If the scenarios I have outlined seem dismal, it gets worse. One ofthe enchanting features of the Internet over the past decade has been unabashed, free-wheeling innovation. To become a billionaire, start with a garage.The evolving information market models are bad news for innovation. If you expect your ISP to encourage innovation, remember that these guys are your local telephone or cable company, organizations not known for their inventiveness. Microsoft or AOL might do a little better, but monopolists have little incentive to innovate unless they feel the hot breath of potential competitors on their backs. A monopolized information market, tightlybound with restrictive intellectual property rights and exclusivity arrangements, is likely to present formidable barriers to potential competitors.

Is the looming problem of marketing information a serious impedimentto recovery of the Internet economy and the digitalization of commerce? Probably not. The solutions that resolve the problem of the digital commons are likely to be ingenious ways to collect money from consumers with little noticeable pain, and these should facilitate the operation of the Internet as a market for goods and services. Just don't expect it to be free.

Daniel McFadden won the Nobel Prize for economics in 2000. He is theE.
Morris Cox Professor of Economics at the University of California, Berkeley.
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