Tragedy of the Commons

Lately, I've been thinking about the current Intellectual Property situation, from an economics standpoint.

(If you're already familiar with the economics of intellectual property or just don't give a damn, click here to skip down to my proposal.)

In many cases, such as works of art, the market is in monopolistic competition, so there is a high degree of variety and prices are what most consumers would consider "fair". Although an artist has a monopoly on his own product, the current intellectual property system works well enough because:

• There are millions of other good artists to choose from, and
• You almost never have any dire need for a particular work of art. (Exception: Hedonism Bot)

However, with patents and software copyrights, there is often no substitute, and the market is a plain old monopoly. Microsoft, for instance, has a monopoly on operating systems that can run DirectX 10, so if your business needs software that requires it, you'd better shell out whatever price Microsoft asks. More importantly, if you suffer from a deadly disease for which the treatment is patented, your demand for the product is extremely inelastic. This system can lead to serious problems, such as:

• Price gouging
• Deadweight losses (see image, right)

This is where the current intellectual property system is broken - it ceases to be a free market. It is very inefficient in terms of total surplus, and if you're some pansy who cares about human life, you should know that many people die because of the current system.

My Proposal

Although hippies may argue on this, we cannot simply eliminate all patent legislation and call the problem fixed. Without some legal structure, businesses who spent money on R&D would face a disadvantage when competing with those who just mooched. This is called the "free rider problem", and it's the main reason we created the intellectual property system in the first place.

However, there are other, possibly better options. This is my exceedingly complex idea - please tell me what you think, especially if anything similar has been used (successfully or not) in the past.

In order for businesses to conduct research, they must have a monetary incentive to do so. Since the creation of public information is a positive externality that effects everyone with access to that information (or products that can be created due to it), I think its funding should be handled by the government. I think it's safe to assume that now warning lights just flickered on in your heads, since the government is notoriously less efficient at the distribution of money than the free market. Who decides what gets funding? Who decides how much would be fair? That's by far the most difficult part of this problem, since the value of an idea is impossible to gage objectively.

First, there is the matter of who. I think the only fair way to decide this would be in a democratic manner:

• One option would be to poll a statistically significant number of people selected from the same pool as used to select juries. It would have to be a limited number, because polling all voters every time would result in massive voter fatigue. Granted, the average person is a clueless dipshit, but I think that the truly ignorant would pass on their right to vote and allow interested citizens to make the decision, much like they do already.
• Another option would be a panel of elected officials. This reduces the dipshit problem, but increases the risk of corruption, so transparency would be of the utmost importance.
  

Next, there's how much. Ideally, every voter would suggest a reward, and the median value would be the one used. This way, the vote would not be ruined by some idiot who thinks an invention should be worth a million bajillion dollars or negative double infinity dollars. If the majority of people vote "zero", it is voted down.

Ok, now there's the issue of when to vote. I think the vote should take place at least two times:

• First, when someone nominates a desired invention. This would be similar to a software bounty, serving as the minimum reward for the effort of research and reducing the risk involved for a business interested in developing intellectual property.
• Second, once the work is complete.
  
• For inventions that had been initially requested, this would be a bonus for going above and beyond the previously stated requirements. A bonus of $0.01 would just verify that the invention had satisfied the request.
• For inventions that no one had requested, this would typically be much larger, since no minimum reward had been agreed upon previously. If you invent something that no one likes, you might get burned by a low payoff.
  
• Sometimes, the value of an invention isn't clear until long after it's been released to the public. In those cases, voters could nominate it for an additional bonus after a certain time has elapsed since the last vote. At all stages, there would need to be a clear public record stating how much a party has already been rewarded. For a continually useful invention, the money would keep coming for as long as people appreciated it.
  

Now, we have a completed invention, the rights for which are shared by the constituency. These rights could be licensed to other nations or foreign businesses to recoup some of the expenses. The remaining costs would have to be raised with traditional taxes, which would hopefully be less inefficient than the monopolies I'd like to avoid. I'm personally a fan of the land value tax, but that's a whole other debate entirely.

Why My Proposal Will Probably Never Happen

• First off, this idea is a blatant violation of international law (although without our support, this law would probably die).
• Secondly, although this idea would result in a more efficient economy, it hurts big business, and for some strange reason the law tends to work in their favor.
• Thirdly, a drastic and sudden change in the way we conduct business would seriously harm the economy in the short term, and I'm not sure how a progressive transition to this system could happen.
• Finally, I'm not a real economist, and there's probably some major stuff I've overlooked. Put me in my place and point out my ignorance with a cutting comment!

EDIT 01/01/07: A problem has come to my attention - if we were to respect the IP laws of other countries, then it would be advantageous for businesses to conduct research in other countries, so they can enjoy a monopoly. If I think of a good fix, I'll post it.
EDIT 01/02/07: I think the problem is that I'm assuming monopolies should be allowed to do business without any repercussions. The import of their products would have to be taxed to the point of eating up the monopoly surplus. The EU is already doing something like this to Microsoft.