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COMMUNET Home

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COMMUNET  June 1993, Week 2

COMMUNET June 1993, Week 2

Subject:

Harvard Pub Acc Cnf: Net Economics (fwd)

From:

Pres Smith <[log in to unmask]>

Reply-To:

Communet: Community and Civic Network Discussion List

Date:

Sat, 12 Jun 1993 13:01:53 -0400

Content-Type:

text/plain

Parts/Attachments:

Parts/Attachments

text/plain (85 lines)

Subj:   Internet Economics
 
Date: 11 Jun 1993 16:58:38 -0700
From: [log in to unmask] (Sandra Schickele)
To: [log in to unmask]
 
I presented one of the economics papers at the recent conference at
Harvard on Public Access to the Internet. My paper has been described
recently on this list, and I am forwarding a summary of the paper in
the hope it may clarify the recent references.
 
The paper is entitled: The Economic Case for Public Subsidy of the
Internet, and is available by anonymous ftp in either postscript or
ascii format by giving the command:
 
ftp ssugopher.sonoma.edu
or ftp 130.157.2.241
logging in with the username anonymous, and giving your email
address as a password.
Look in directory called "pub".
The ascii version is titled: schickele.txt and the postscript
version is titled schickele.ps.
 
The paper attempts to apply a broad range of economic concepts
to the Internet. Externalities associated with the net are defined and
some attempt is made to measure them. The affect of the market power
(oligopoly power) of some of the producers and consumers in the Internet
"industry" is given a preliminary analysis. Findings of a field called
information economics, which deals with the special economic
characteristics of information as a good, are summarized. Questions
pertaining to the effect of potential economies of scale in production,
possible high levels of required investment (so-called "indivisibilities
in investment"), interdependence in production and consumption, and
other factors are examined. When these characteristics appear in an
industry they cause the market system to be an inefficient producer of a
good. If the market system cannot adequately supply a good, in economic
jargon, that is called "market failure". The contention of my paper is
that the Internet represents a massive case of market failure, and that
network services on a large scale can never be produced adequately
through the private market mechanism. In fact, the Internet is a special
type of good called a "quasi-public good", which means that network
services can be produced to a limited extent by the private market
acting without government intervention, but an efficient market cannot
exist. The electric power industry, the  highway system, the education
system, and the health care system are examples of quasi-public goods.
They can be produced to a limited extent through the private market, but
a functioning modern society requires that they be more widely available
than the private sector can provide. Decisions about funding and control
of quasi-public goods invariably cause profound controversy in our
economic system.
 
One economic characteristic of the Internet which is touched on in my
paper and has seemed to arouse special interest among networkers is the
discussion of transactions costs. When transactions costs are large,
economic theory says that market failure will inevitably occur. One
important type of transaction cost associated with the network is the
cost of enforcing property rights. Private markets can only be
established for goods for which property rights can be guaranteed and
are easily exchangeable.
 
Numerous other economic factors which impact on the production of
network services are analyzed, and it is not reasonable to try to
reproduce the whole argument of the paper here, but the conclusion of
the paper is as follows:
 
The application of price theory (modern economic theory) to the Internet
leads to the conclusion that market prices cannot by themselves
efficiently allocate resources for the production and use of network
services.
 
The readers of the list may want to know who is making these assertions,
so I include something of my background. I am an economist. My economics
degree is from the University of Chicago. I am a Professor of Finance in
the California State University System at the Sonoma State campus.
 
Sandra Schickele
[log in to unmask]
 
 
-----------------------------------------------------------------------------
  Prescott Smith   -  Univ. of Mass/Amherst   -  [log in to unmask]
     Ednet - a forum exploring the educational potential of the Internet
   e-mail to:  [log in to unmask]   1st line:  Sub Ednet (Your Name)
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