Information Goods Pricing and Copyright Enforcement: Welfare Analysis

We consider how the government should set the fine for copying, tax on copying medium, and subsidy on legitimate purchases, whereas a monopoly publisher sets price and spending on detection. There are two segments of potential software users--ethical users who will not copy, and unethical users who would copy if the benefit outweighs the cost. In deciding on policy, the government must consider how the publisher adjusts price and detection to changes in the fine, tax, and subsidy. Our key welfare result is that increases in detection affect welfare more negatively than price cuts. We also show that the tax is welfare superior to the fine, and that a subsidy is optimal. Generally, government policies that focus on penalties alone will miss the social welfare optimum.