Felix Salmon reports that despite the fact that it’s extremely easy to get around the New York Times paywall, many people are nevertheless paying for the online subscription:

But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.

Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip…

At first glance one is tempted to celebrate what appears to be irrationality. Economists are fond of advocating rational behavior, but with the New York Times paywall we have behavior which is seems individually irrational, yet helps preserve a commons. With tipping, if you presume that it is the most effective system of encouraging efficient service, then again you have individually irrational behavior that preserves the commons (the commons here is the system itself). Of course behaviors like this aren’t actually irrational, because people value fairness, and the are willing to pay more in order to feel fair. Here our sense of fairness leads to welfare improving outcomes: people feel better because they are behaving in accordance with fairness, and a commons is preserved.

On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them  (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.

With respect to intellectual property, fairness can cut both ways. It is possible for most people to circumvent music copyrights with very little effort. Yet, for many a sense of fairness prevents them from “stealing” music. Sometimes this is efficient and sometimes it isn’t. There are many small bands for whom small drops in album sales could lead them to produce less albums and perhaps leave the industry all together. When people pay for their music rather than illegally download it out of a sense of fairness, the outcome is efficient.  There are others who produce less output because the wealth that copyrights afford them means they don’t need to create as much. For example, I’ve argued you could possibly include Stephen Malkmus in this category. Thus buying his music out of a sense of fairness, rather than illegally downloading it, can lead to less efficient outcomes. Fairness can be good or bad in this context.

On the margin, the public’s demand for fairness in copyright laws is probably inefficient. Of course how much the current laws are a function of voter demand versus regulatory capture is a matter for debate. But even if left to popular vote without industry interference, I believe we’d end up with an inefficiently strict regime.

In the same industry, to give one more example, market demand for what is perceived to be fair ticket selling policies certainly leads to inefficient outcomes: scalpers are left with the surplus instead of the artists, thus no extra output is incentivized. The market outcome is of course bolstered by legal restrictions on resales, resulting in part from fairness.

Maybe this is a trivial point that only economists need to be reminded of, but I think it merits keeping in mind. Sometimes fairness leads us to more efficient outcomes, like preserving the commons, and sometimes it leads us to inefficient outcomes, like copyright laws. Be skeptical of fairness, but do not toss it aside completely.

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