August 19, 2002
From the desk of Jane Galt:Meanwhile, something I saw on
Meanwhile, something I saw on Norah Vincent’s homepage inspired me to drag out my soapbox again. It was an article on spammers, and how much spam basically, well, sucks. Amen, sister, and hallelujah!
But what started me thinking was the question she repeats, and attempts to answer; namely, “Why, dear Lord? Why?!!!!” Which made me think of one of my very favorite economic ideas, the Coase Theorem, which was designed to answer just such questions as these.
The Coase Theorem was developed by a man named, coincidentally enough, Ronald Coase. If you are interested in a fuller explanation, you can find an excellent one here, but in short, the theorem states that absent transaction costs, it does not matter whether a polluter has the right to pollute, or their neighbors have the right to be free from pollution; markets will permit the amount of pollution that achieves the maximum social utility (otherwise known as the efficient outcome).
To see how this works, let’s take a very simple example: we’re neighbors. You like to play your stereo on 11 at 3 am. I like to sleep, sans the sounds of Def Leppard’s Greatest Hits, at that hour. Do you play your stereo, or do I get to sleep?
Most people assume that the answer depends on who has the legal rights: yours to listen to your stereo, mine to be free of noise pollution. But actually, that needn’t be the case; you could pay me to let you listen. In fact, neighbors do this kind of thing all the time, with easements and such: they pay for the right to violate their neighbor’s rights.
So say you have the legal right to listen to your stereo (yes, I know you don’t in the real world; it’s a model. ‘Kay?) Now, say I would be willing to pay up to $200 a month – the price of moving to a new, noise free apartment – to get you to stop. You only value the ability to listen to your stereo at $100 a month – the price for the ear treatments you’ll need if you listen to that much Def Leppard with headphones. The result is quiet. Now, say I have the right to quiet. You’re only willing to pay me $100 a month – but it would take at least $200 a month to persuade me to let you play your stereo at 3am. The result is still quiet. With enforceable contracts and no transaction costs, the result is the same no matter who has the legal right.
But what does this have to do with spam? I hear you cry. Why, everything, my little chickadees. What is spam but the pollution of one’s mailbox? Or, as an economist might say, spammers impose substantial negative externalities on third parties in their quest for the small number of people who are interested in buying their wares (a recent article I saw put their hit rate at .0025%).
So if Coase is right, why isn’t the market taking care of it? After all, the dollar value of the amount of time wasted by US citizens deleting spam is certainly higher than the revenue spamming yields.
Well, for one thing, transaction costs aren’t nonexistent. The value of not getting any one piece of spam is probably less than 1 cent. There’s no system for remitting such small sums either way, and if there were, it would almost certainly cost more by itself than you would be willing to pay to get rid of a piece of spam, or than the spammer would be willing to pay to send it. Of course you and I, who would be glad to live in a spam-free environment, would revel in the inevitable result of putting such a system in place, which is no spam. But as attractive as it might be, it’s not a Coasean solution.
Another problem is that the rights involved are nowhere near as clear as noise pollution or the like. On the one hand, spammers are violating the private property of the ISP’s, who have made it clear that they don’t want spam sent or received on their networks. But on the other hand, there’s the first amendment, which the Supreme Court has ruled gives anyone the right to send you a letter (at least one that doesn’t contain, you know, anthrax). It’s not that much of a stretch to extend that right to mailboxes..But on the third hand, the extremely low costs of sending spam – much, much lower than mail or door-to-door canvassing – mean that so much of it is generated that the social disutility of the mailbox overload might outweigh the social utility of the speech. And on the fourth hand. . . as you can see, there’s no clear cut right to give us a starting point.
And a huge problem facing any attempt to resolve this in a market setting is that there’s no real way to enforce any contracts you make with spammers. When you make a contract with your neighbor not to play his music, enforcement is pretty easy. After all, he’s right there next door; you can drag him into court any time you want. But let’s say you make a contract with Spam Inc. not to send you any more advertisements for miracle hair growth products or pictures of Barely Legal Teenage Girls. So Spam Inc. doesn’t send you any more – but the founders of Spam Inc. open up shop as Junkmail.com and start sending you even more junk than ever. The anonymity of the internet makes it very hard to draw up binding contracts of this sort.
And finally there’s the question of moral hazard, a fancy economist’s word for the tendency of certain types of transactions to encourage the very problem they are designed to avoid; for example, federal flood insurance that encourages people to build their houses on flood plains and thereby increases the amount of damage that is done by floods.
If you make a contract with your neighbor not to play his music at 3 am, you probably have a limited number of other neighbors, of which few will be motivated to buy Def Leppard’s Greatest Hits and stay up until 3 am every night in order to extort from you a couple of hundred bucks a night. And due to the limitations of the 3 dimensional space-time topography in which we find ourselves, it would be hard for hordes of insomniac Def Leppard fans to build houses around yours in the hopes of getting a payout for something they enjoy already. Spam has no such inherent limitations. Pay off the 150 people who are estimated to send 90% of the spam in this country, and you’ll find you have 1500 more setting up spamming companies in order to get in on the payoff.
In short, there isn’t (gasp) a market based solution, and short of a technological breakthrough that either significantly lowers transaction costs, or improves filtering to the point where spammers won’t bother, there won’t be.
Posted by Jane Galt at August 19, 2002 2:16 PM | TrackBack | Technorati inbound links"); ?>