In Notice Failure and Notice Externalities, Peter S. Menell and Michael J. Meurer coin a new term—a “notice externality.” In the process, they do nothing less than turn the conventional story about property rights and externalities on its head and reconceptualize many of the inefficiencies of contemporary intellectual property regimes.
The externality part of the term should be familiar by now, given the extent to which economic thinking has permeated intellectual property discourse. An externality arises whenever one party’s conduct has consequences for other parties that are not considered—read “internalized”—by the decision maker. In some of the classic examples, the externalities are negative: the conduct of sending pollution out a smokestack generates negative externalities for neighbors. In other classic examples, the externalities are positive: the conduct of inventing new technologies generates benefits for all those whose lives are improved by using the technology.
Externalities may lead to market failure as the private and social welfare implications of undertaking the activity diverge. Polluters over-pollute. Inventors under-invent. In the conventional story of property rights and externalities, property rights are seen as one way, among others, of eliminating externalities and staving off market failures. Neighbors can bring nuisance suits to prevent levels of pollution above the social optimum by forcing the land owner to internalize the negative externality. Intellectual property rights allow inventors and creators to internalize some of the social welfare gains attributable to their technologies and creative works, bringing investment in innovation and creativity closer to the socially optimal level. In both cases, property rights serve the function of internalizing externalities and decreasing the divergence between the private and social welfare implications of an individual’s conduct. (There are many subtleties in, and problems with, this conventional story, but this is not the place to pursue them.)
Menell and Meurer offer a mind-bending twist on the conventional story of the relationship between property rights and externalities. In their story, the act of claiming property rights in a resource is the conduct that creates the negative externalities. They argue that my act of claiming a copyright or patent has welfare-decreasing consequences for you (if you are an author or inventor, respectively) and that I do not internalize those consequences. More specifically, Menell and Meurer argue that the negative externalities derive from the fact that you had poor notice of my rights—hence the term “notice externality.” In a world of costless, perfect information and unambiguous property rights, there would be no notice externalities. In the actual world, however, Menell and Meurer argue you suffer the following costs because I claim property rights in the “neighborhood” or “vicinity” of your authorial or inventive pursuits: “(1) costs of determining owners of potentially conflicting property rights; (2) costs of ascertaining boundaries of those properties; (3) costs of assessing the scope of those property rights; and (4) dispute resolution costs.”1
The crux of the argument is that property may mitigate some externality problems, but that it can also generate a new externality problem. Notice externalities are therefore second-order externalities. We created legal property regimes precisely because we wanted to ensure that actors would internalize the externalities of non-legal conduct such as manufacturing or inventing. Think of these as the first-order externalities. Menell and Meurer demonstrate that we need to take into account the second-order externalities that result from using the legal property regime to achieve the goal of internalizing the first-order externalities.
In an unpublished book review of Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk by James Bessen and Michael Meurer that I wrote a number of years ago2, I mulled on one possible equilibrium that could result from understanding the act of claiming property as an act with negative externalities. If what Menell and Meurer refer to as notice externalities are sufficiently large, individuals who claim property rights in resources could generate what I called a tragedy of property. “A tragedy of property results from the inefficient, externality-generating overuse of the institution of property itself.” The private benefit that each individual receives from claiming a patent may be positive, but the negative externalities that the property claimant imposes on others may be greater in magnitude. The tragedy of property is symmetrical to the tragedy of the commons, but it focuses on the second-order externalities generated by property claims rather than first-order externalities that are mitigated by property claims.
This short review has framed Notice Failure and Notice Externalities as an article about the relationship between property rights and externalities, and it thus may be taken to suggest that Menell and Meurer have written an article that is chock full of high-level property theory. In actuality, however, that is far from the truth. The article is drafted as an eminently practical piece. In part, the article is a descriptive exercise—a reconeptualization of the inefficiencies of intellectual property that makes us see many problems of which we are already aware in a new light. Picking up on a now-familiar theme, Menell and Meurer argue that real property and intellectual property differ in the magnitude of the notice externalities that they generate.3 The nature of real property rights and the institutions that have developed to administer them is such that one person’s land claims impose only minor notice externalities on other land developers. Menell and Meurer develop an extensive and detailed taxonomy of differences between real property and intellectual property regimes to explain why notice externalities are much more significant in the latter. In part, the article also provides a platform for some innovative reform proposals. Because they see the problems differently, Menell and Meurer offer different remedies. Because the problems are revealed as externality problems, they are able to bring the full slate of responses to externality problems that have been developed in other contexts to bear on intellectual property. They develop some original solutions that hybridize the traditional responses, too.
- In theory, you suffer some notice externalities even if I don’t actually make any resource claims. The fact that I could make a resource claim may lead you to incur search costs.
- Kevin Emerson Collins, Patent Failure: A Tragedy of Property.
- This is a theme that is explored at some length in Patent Failure without the label of “notice externalities.”