Handbook on the Economics of the Internet
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Handbook on the Economics of the Internet

Edited by Johannes M. Bauer and Michael Latzer

As the single most important general purpose technology of recent times, the Internet is transforming the organization, competitive structure and business models of the private, the public and non-profit sectors. In 27 original chapters, leading authors discuss theoretical and applied frameworks for the study of the economics of the Internet and its unique economics as a global information and communications infrastructure. They also examine the effects of the Internet on economic transactions (including social production, advertising, innovation, and intellectual property rights), the economics and management of Internet-based industries (including search, news, entertainment, culture, and virtual worlds), and the effects of the Internet on the economy at large.
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Chapter 12: The economics of privacy, data protection and surveillance

Ian Brown


Economists have investigated a range of questions regarding individual and business decisions related to the use of personal information, as well as the possible contours and effects of privacy regulation. More recently, behavioral economists have tried to understand the factors underlying the ‘privacy paradox’ – that individuals commonly claim to be concerned about privacy, but behave in ways that seemingly contradict that claim. This chapter first describes the standard economic analysis of privacy, data protection and surveillance, looking at the costs and benefits to different parties and the incentives each therefore has, as well as the aggregate social welfare impacts of their decisions. It then considers the market failures that can lead to non-optimal outcomes, including information asymmetries, negative externalities, and cognitive biases of individual decision-makers. Finally, it analyzes the economic impact of various regulatory options for correcting these market failures, an important consideration given that most advanced and many emerging economies now have extensive systems of regulation in this area.

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