National Academies Press: OpenBook

Resolving Conflicts Arising from the Privatization of Environmental Data (2001)

Chapter: The Rationale for Public Funding for the Trunk and Roots

« Previous: Economic Characteristics of the Provision of Environmental Information
Suggested Citation:"The Rationale for Public Funding for the Trunk and Roots." National Research Council. 2001. Resolving Conflicts Arising from the Privatization of Environmental Data. Washington, DC: The National Academies Press. doi: 10.17226/10237.
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Page 42
Suggested Citation:"The Rationale for Public Funding for the Trunk and Roots." National Research Council. 2001. Resolving Conflicts Arising from the Privatization of Environmental Data. Washington, DC: The National Academies Press. doi: 10.17226/10237.
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Page 43
Suggested Citation:"The Rationale for Public Funding for the Trunk and Roots." National Research Council. 2001. Resolving Conflicts Arising from the Privatization of Environmental Data. Washington, DC: The National Academies Press. doi: 10.17226/10237.
×
Page 44
Suggested Citation:"The Rationale for Public Funding for the Trunk and Roots." National Research Council. 2001. Resolving Conflicts Arising from the Privatization of Environmental Data. Washington, DC: The National Academies Press. doi: 10.17226/10237.
×
Page 45

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POLICY AND ECONOMIC FRAMEWORK FOR PUBLIC-PURPOSE 42 ENVIRONMENTAL INFORMATION SYSTEMS The public-good aspect of environmental information also makes it difficult, if not impossible, for commercial companies to efficiently provide the information. Thus, there are two economic arguments for relying on the public sector (government agencies and private not-for-profit entities) to collect and synthesize core information (i.e., the roots and trunk of the information system tree). On the other hand, value-added products and services tailored to particular clients may not be characterized by declining average costs and may easily be made exclusionary (even if they remain nonrivalrous). As a result, there is a greater potential for competition in the value-added sector (the branches of the information tree), mitigating the inefficiencies of monopoly. Individual firms will retain some degree of monopoly, so one cannot expect to achieve the ideal efficiency ascribed to perfectly competitive markets. Similarly, public-sector organizations producing value-added products are also subject to inefficiencies due to “dysfunctional” incentives.6 Society is thus forced to make case-by-case analyses of the branch activities and to search for the best institutional structures appropriate to each case. Unfortunately, the ambiguities and uncertainties inherent in these cases make them subject to ideological biases, such as a general distrust and dislike of government intervention, or conversely, a naively excessive faith in the capabilities and altruism of public servants and academics. The Rationale for Public Funding for the Trunk and Roots As noted above, the economic rationale for public funding of the trunk and roots of the information tree derives from the public good nature of environmental information, and the characteristic of declining average costs. The public good aspect can be summarized as follows. The core products of the trunk are intended to help establish facts for all. It is highly undesirable for society that their use for public purposes be encumbered by intellectual property rights. The public benefits from scientists combining facts freely from many different sources to create new knowledge or understanding. Although 6C.Wolf Jr., 1988, Markets or Governments: Choosing Between Imperfect Alternatives. MIT Press, Cambridge, Massachusetts, 220 pp.

POLICY AND ECONOMIC FRAMEWORK FOR PUBLIC-PURPOSE 43 ENVIRONMENTAL INFORMATION SYSTEMS intellectual property rights enable individual creativity and industry to be rewarded in the marketplace, they are fundamentally a restrictive practice that distorts the exchange of information in ways that can have undesirable side effects, particularly on the conduct of environmental science.7 For example, requiring scientists to obtain multiple permissions from possibly unknown sources before working with the data could become very burdensome, even if the fee is negligible. If the administrative burden is too great, scientists will abandon the research and the societal benefits from the potential new knowledge will not be realized.8 Consequently, the greatest benefit from use of taxpayer resources comes from full and open access to scientific information.9 Recommendation. Environmental information systems that are created by the U.S. government to serve a public purpose should continue to establish facts that are accessible to all. To facilitate further distribution these facts should be made available at no more than the marginal cost of reproduction and should be useable without restriction for all purposes. The aspect of declining average cost leads to the following observations: • Homogeneous product markets lead to monopolies. In a homogeneous product market10 the products desired by customers are identical and the only avenue for commercial competition is price. In the 7For example, see NRC, 1997, Bits of Power: Issues in Global Access to Scientific Data. National Academy Press, Washington, D.C., p. 132–188. 8The social returns to investment in basic scientific research far exceed those for the average investment dollar. See Council of Economic Advisers, Economic Report of the President 1994, p. 190; C.I.Jones, and J.C.Williams, 1998, Measuring the Social Return to R&D, Quarterly Journal of Economics, v. 113(4), p. 1119–1135. 9K.J.Arrow, 1962, Economic welfare and the allocation of resources for invention, in The Rate and Direction of Inventive Activity, Universities-National Bureau Committee for Economic Research, Princeton University Press, Princeton, New Jersey, p. 618. 10 An example of a homogeneous product market is the market for a firm's stock shares.

POLICY AND ECONOMIC FRAMEWORK FOR PUBLIC-PURPOSE 44 ENVIRONMENTAL INFORMATION SYSTEMS long run only a single firm can operate profitably in such a market.11 Continued profitability requires enforcement of restrictions on the redistribution of products by customers. Once a monopoly is established, prices will exceed marginal costs. As a result, the total number of sales will be lower than they would be if price equaled marginal cost. For public-purpose information, this means a reduction in social welfare. • The total cost of the information system is dominated by the costs of making the observations and assembling, validating, and synthesizing them into dependable, scientifically valid, well- documented products. For the shared environmental systems under discussion measurements must be made using a variety of remotely sensed and in situ instruments, positioned both throughout the United States and in other countries, and combined with retrospective data. The infrastructure, communications, and personnel costs of participating facilities are high compared with the cost of disseminating the resulting data and information products.12 • The cost of making and distributing additional copies of each core product is negligible compared to the cost of generating the master copy. Although this situation has always been the case, copying and distributing data over the Internet or on other digital media has greatly reduced the cost of disseminating data and products relative to printed publications and older media such as microfilm. Costs of storing and accessing large volumes of data electronically continue to decline, making it feasible to copy whole collections of retrospective data, once they are in electronic format.13 • It is very difficult for a commercial company to recover the cost of generating core products by selling them in a competitive market, without imposing restrictions on their re-use by customers. The following scenario illustrates the negative impact of relaxing 11 See C.Shapiro and H.R.Varian, 1999, Information Rules. Harvard Business School Press, Boston, Massachusetts, p. 25. 12 An example of the high cost of data collection is given in USGS, 1998, A New Evaluation of the USGS Streamgaging Network: A Report to Congress, 20 pp. See also C.Shapiro and H.R.Varian, 1999, Information Rules. Harvard Business School Press, Boston, Massachusetts, p. 3. 13 This is true as long as copying does not involve a transition to new technology. Migrating data to new media is generally very expensive. See NRC, 1995, Preserving Scientific Data on Our Physical Universe. National Academy Press, Washington, D.C., 67 pp.

POLICY AND ECONOMIC FRAMEWORK FOR PUBLIC-PURPOSE 45 ENVIRONMENTAL INFORMATION SYSTEMS enforcement restrictions on the homogenous market discussed above. Suppose that a commercial organization (the primary producer) is responsible for producing a particular core product and recovering the primary cost of production (say $100,000,000) through sales. For the organization to break even, it must set a sales price at least equal to the primary cost divided by the projected number of sales (say 10,000). In this hypothetical case the minimum sales price would be $10,000 per copy. But what if the conditions of sale did not restrict further reproduction by purchasers? In that case, the product will not be commercially viable. Without such a restriction an intermediary for a group of potential users (say 100 in number) can purchase a single copy at the primary price, reproduce that copy at negligible cost, and recover expenses ($10,000) by distributing a number of copies (say 100) among the group at the greatly reduced secondary price of only $100 per copy. Such “leakage” cuts into primary sales and reduces the total revenue of the unfortunate primary producer. Even worse, the $100 secondary price is also unrealistic, because it is vulnerable to a similar strategy pursued by another intermediary who purchases one copy at $100 but sells 10 copies at $10 each. Such competition can be expected to lower the street price until there is no possibility of the primary producer recovering even a significant fraction of the total cost of production. Under these circumstances, a lower limit to the street price is set by the marginal cost of reproduction (i.e., by the additional cost to an intermediary of making a single extra copy). • The social return generated from the trunk and roots of public- purpose information systems may dwarf private returns. When a for-profit firm produces and sells data or information, even under patent and copyright protections, it may not capture in its revenues all the value that it creates for society. In this case (by definition) the total return to society exceeds the private return to the firm. Thus it is possible that the private return from a contemplative activity might be less than the cost, in which case the activity would not be undertaken by the firm, whereas the social return might exceed the cost, and hence the activity should be undertaken by society. As an extreme example, private production of a pure public good might yield a large social return but no private return whatsoever. Conclusion. Because of the cost structure of public-purpose environmental information systems and the need for their

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Reliable collections of science-based environmental information are vital for many groups of users and for a number of purposes. For example, electric utility companies predict demand during heat waves, structural engineers design buildings to withstand hurricanes and earthquakes, water managers monitor each winter's snow pack, and farmers plant and harvest crops based on daily weather predictions. Understanding the impact of human activities on climate, water, ecosystems, and species diversity, and assessing how natural systems may respond in the future are becoming increasingly important for public policy decisions.

Environmental information systems gather factual information, transform it into information products, and distribute the products to users. Typical uses of the information require long-term consistency; hence the operation of the information system requires a long-term commitment from an institution, agency, or corporation. The need to keep costs down provides a strong motivation for creating multipurpose information systems that satisfy scientific, commercial and operational requirements, rather than systems that address narrow objectives. Resolving Conflicts Arising from the Privatization of Environmental Data focuses on such shared systems.

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