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Benefits from Information Collection Outweigh Costs

Benefits from Information Collection Outweigh Costs

Rubin, Hammock: Privacy Arguments Not Based on Economic Evidence

Contact: Amy Smorodin
(202) 828-4405

March 17, 2011 – Economic analysis shows that the benefits of online information collection, such as ad-supported applications and content, greatly outweigh any costs or risks, state Paul Rubin and Michael Hammock in “Applications Want to be Free: Privacy Against Information,” released today by the Technology Policy Institute. Current arguments for increased privacy regulation are not based on economic theory or evidence and instead rely on anecdotes or a perceived inherent “right” to privacy online. As a result, policymakers should be leery of making radical changes to the current privacy regime without carefully considering the economic consequences.

Rubin, TPI Senior Fellow and Professor of Economics at Emory University, and Hammock, Adjunct Professor of Economics at Middle Tennessee State University, advise that “arguments for increased online privacy are based on rights (rather than efficiency) and anecdotes (rather than data).” Moreover, advocates for stricter privacy regulation do not acknowledge the benefits created by the current system of information collection, where more available information leads to more targeting and so more valuable advertising and, as a result, more free applications and content. The authors also argue that some concerns voiced by advocates, such as data breaches and identity theft, are information security problems, not privacy issues, so restricting information collection is not an appropriate solution. “This is like arguing that doing away with privately owned cars would be a means to reduce automobile accidents – the cure would be worse than the disease.”

Rubin and Hammock specifically address whether a default opt-in system for data collection would be superior to the current “opt-out” system, where consent is implied unless consumers act to prevent information being collected. Consumer surplus from web services, estimated by some to be $100 billion in the U.S and Europe, is significantly larger than the value of avoiding information collection, estimated to be $28 billion. The authors conclude that “the fact that the collection of personal information has generated such a huge surplus of benefits in excess of costs suggests that we should be reluctant to impose fundamental changes.”

The authors also warn against basing policy decisions on surveys that suggest consumers dislike targeted advertising and information collection, arguing that the opinions are not evidence that consumers are being harmed. Studies have shown that consumers both fail to take basic steps to ensure privacy, through such tools as browser settings or encryption, and have a limited understanding of the specifics of online data collection. Hence, there is a disconnect between the average consumer’s opinions and actions. Rubin and Hammock cite the support for stricter privacy regulation as an example of “rational irrationality”: because consumers do not bear the consequences of an incorrect opinion, they have no need to consider the costs or benefits of the action.

Rubin and Hammock conclude that the current system of information collection and free online services works well in the United States and urge policymakers to view the issue in economic terms. “Of course, there is more to life and policy than economics, but every policy decision involves costs and benefits, whether one recognizes them or not.”

Applications Want to be Free: Privacy Against Information” is available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.

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