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4 Policy and Economic Framework for Public- Purpose Environmental Information Systems DATA POLICY Most environmental information systems are created and funded by the government for public purposes, including monitoring changes in the environment, research, monitoring the provisions of intemational agree- ments, and informing the public about environmental issues. Because the resulting inflation is built into innumerable judgments and assessments of considerable public importance, it must be highly credible. To be credible a sample of the data or data product must be independently tested and validated (see Box 4.1 and Appendix A). As a result, the core products of public-purpose information systems and the processes by which they were derived have to be open to scientific scrutiny and therefore be in the public domain. This full and open data policy satisfies the needs of scientists, government agencies, policy makers, and the general public. However, it tends to limit the enthusiasm of private-sector organizations, which rely on proprietary data for economic reasons, to be involved in public-purpose information systems.' Of course, environmental information systems for commercial purposes are being established by private-sector companies and to some extent by commercialized government agencies in other countries. The data products of these systems are created under a proprietary regime that seeks to maximize revenues by controlling the flow of information. Such a policy limits the usefulness of the data to scientists as well as to other public-sector organizations that rely on science-based products and interpretation. 37

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38 The Privatization of Environmental Data Nevertheless, some private-sector entities and Congress are urging government agencies to increase the involvement of the private sector in collecting and disseminating data, and creating data products (see Chapter 2, "Private-Sector Views"~. Many government-developed satellite technologies are sufficiently mature that private-sector companies can profitably enter the remote-sensing industry by launching their own satellites or by developing new applications for commercial and public-sector customers. However, once established in the industry, private-sector organizations often do not want the government to compete with them by continuing to collect observations or to produce

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Policy and Economic Framework 39 and disseminate information products. This view has been echoed by Congress in bills authorizing funding for federal agencies,2 and in legislation forbidding agencies from competing with the private sector (see Box 2.2~. Congress is seeking to create a smaller, more efficient government by transferring agency functions to the private sector (i.e., privatization; see Box 1.~) to the extent possible. The critical question is how far can privatization go without jeopardizing the goals of a public- purpose environmental information system? Mechanisms for involving the private sector in government operations include (1) contracting out data collection or services, (2) establishing partnerships to collect, produce, and disseminate data and information products, and (3) privatizing the government function. ~ the case of contracts a commercial vendor can be required to act as an agent of the government and thus abide by the government's policy of full and open access. With public-private partnerships, a data policy must be negotiated that permits commercial objectives to be achieved while producing the credible data that the public sector needs. Because the economic and data policies of the public and private sectors are so different, successful public-private partnerships are difficult to create. Finally, under privatization the private sector gains complete control of what was the government function and sets the terms of access. In such cases the public sector becomes one of several paying customers, although certain segments (e.g., researchers) may receive data, products, or services at discounted prices. The roles and potential conflicts among stakeholders in environmental information systems created purely or partly for public purposes are descnbed below. Many of these conflicts derive from the well-known transition in the development of a new technology from an exploratory stage of basic research and demonstration to a mature stage 2Recent legislation noting the undesirability of government competition with the private sector includes National Aeronautics and Space Administration Authorization Act of 2000, Public Law 10-391; National Defense Authorization Act for Fiscal year 2000, Public law 106-65; National Weather Service and Related Agencies Authorization Act of 1999, Report 106-146 to accompany H.R. 1553, 106th Congress, 1st session; and Department of Interior and Related Agencies Appropriations Bill, 2001, Conference Report on H.R. 4578, House of Representatives, September 29, 2000.

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40 The Privatization of Environmental Data of commercial application.3 Government agencies commonly fund the exploratory stage because the investment cost and risk are high. Once the technology is well understood and reliable (the mature stage), private enterprise is more likely to develop applications and products. Core products of environmental information systems tend to be situated at just such a transition, when prototypes developed with research funds demonstrate a potential for many applications, some clearly public, but others of commercial value. COMPATIBILITY OF OPEN ACCESS WITH A COMPETITIVE MARKET This section presents the rationale for the following conclusions: (1) the Junk and roots of the information Dee should be publicly funded to ensure that credible and dependable core products are made available on a full and open basis; (2) information derived from these core products should be distributed through value-added branches by a combination of public and commercial organizations serving different communities of end users; and (3) under certain conditions public-sector purchase of commercially available data and information services may be appro- priate. The argument depends on economic considerations (i.e., the conditions under which competitive or monopolistic markets are likely to form) coupled to the particular requirements and realities of shared, public-purpose information systems. Economic Characteristics of the Provision of Environmental Information The provision of environmental information differs from standard production activities in two ways: 1. The marginal cost of distributing a copy of the information is typically very small, sometimes even negligible, compared to the initial cost of collecting and synthesizing the data and producing an information 3G.A. Moore, 1999, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. Harperbusiness, New York, NY, 227 pp.

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Policy and Economic Framework 41 product. In economic teas this phenomena is referred to as declining average costs. 2. The scientific enterprise requires that basic researchers subject their findings, including a description of the data used and the models and methods of analysis, to peer review. The precise texts of articles and books may be subject to copyright, but the substance of the material must be made available to all parties willing to pay the incremental cost of distribution (e.g., the cost of a subscription or the price of a book). Thus, the production of scientific information is nonexclusionary. Furthermore, scientific information is nonrivairous because providing the information to one party does not diminish the information available to another party. A public good, such as scientific information, is both nonexclusionary and nonrivairous. The first (declining average costs) is a property of the technology of producing information products, whereas the second (public-good nature of information) is largely a property of our scientific institutions. Thus, one can imagine another system in which all the products of all scientific research could be copyrighted and patented and the underlying data and analysis kept largely secret.4 However, science would not necessarily flourish under such a system. The declining-average-cost character of the environmental enterprise has the well-known implication that, if the organizations producing the information products are private and for-profit, there will be a tendency to create monopolies, with all their attendant inefficiencies.5 ~- efficiencies will also occur if the organizations are not-for-profit but recover all their costs Tom user fees (e.g., commercialized government agencies in Europe). Consequently, in the United States the primary producers of environmental information are government agencies subsidized by tax dollars and not-for-prof~t research organizations (e.g., research universities) funded by foundations and government grants. 4Given the ease of copying and transmitting information, keeping scientific secrets and enforcing copyright and patent laws is only partially feasible. 5Not all markets are created equal, and some are much more efficient than others. The ideal benchmark case is the 'perfectly competitive market" in which prices are equal to marginal costs and therefore product sales occur at the efficient level. In other words, a market is efficient when all buyers willing to pay at least the marginal cost of a product are actually successful in making their purchases.

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42 The Privatization of Environmental Data The public-good aspect of environmental information also makes it difficult, if not impossible, for commercial companies to efficiently provide the information. Thus, there are two economic arguments for relying on the public sector (government agencies and private not-for- profit entities) to collect and synthesize core information (i.e., the roots and trunk of the information system tree). On the other hand, value-added products and services tailored to particular clients may not be characterized by declining average costs and may easily be made exclusionary (even if they remain nonrivairous). As a result, there is a greater potential for competition in the value-added sector (the branches of the information tree), mitigating the inefficiencies of monopoly. Individual firms will retain some degree of monopoly, so one cannot expect to achieve the ideal efficiency ascribed to perfectly competitive markets. Similarly, public-sector organizations producing value-added products are also subject to inefficiencies due to "dysfunctional" incentives.6 Society is thus forced to make case-by-case analyses of the branch activities and to search for the best institutional structures appropriate to each case. Unfortunately, the ambiguities and uncertainties inherent in these cases make them subject to ideological biases, such as a general distrust and dislike of government intervention, or conversely, a naively excessive faith in the capabilities and altruism of public servants and academics. The Rationale for Public Funding for the Trunk and Roots As noted above, the economic rationale for public funding of the trunk and roots of the information tree derives from the public good nature of environmental information, and the characteristic of declining average costs. The public good aspect can be summarized as follows. The core products of the trunk are intended to help establish facts for all. It is highly undesirable for society that their use for public purposes be encumbered by intellectual property rights. The public benefits from scientists combining facts freely from many different sources to create new knowledge or understanding. Although 6C. Wolf Jr., 1988, Markets or Governments. Choosing Between Imperfect Alternatives. MIT Press, Cambridge, Massachusetts, 220 pp.

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Policy and Economic Framework 43 intellectual property rights enable individual creativity and industry to be rewarded in the marketplace, they are fundamentally a restrictive practice that distorts the exchange of information in ways that can have undesirable side effects, particularly on the conduct of environmental sciences For example, requiring scientists to obtain multiple permissions from possibly unknown sources before working with the data could become very burdensome, even if the fee is negligible. [f the administrative burden is too great, scientists will abandon the research and the societal benefits Tom the potential new knowledge will not be reaTized.8 Consequently, the greatest benefit from use of taxpayer resources comes Tom full and open access to scientific information.9 Recommendation. Environmental information systems that are created by the U.S. government to serve a public purpose should continue to establish facts that are accessible to all. To facilitate further distribution these facts should be made available at no more than the marginal cost of reproduction and should be useable without restriction for all purposes. The aspect of declining average cost leads to the following observations: Homogeneous product markets lead to monopolies. ~ a homogeneous product marketi the products desired by customers are identical and the only avenue for commercial competition is pnce. In the 7For example, see NRC, 1997, Bits of Power: Issues in Global Access to Scientific Data. National Academy Press, Washington, D.C., p. 132-188. The social returns to investment in basic scientific research far exceed those for the average investment dollar. See Council of Economic Advisers, Economic Report of the President 1994, p. 190; C.I. Jones, and J.C. Williams, 1998, Measuring the Social Return to R&D, Quarterly Journal of Economics, v. 113~4),p. 1119-1135. 9K.J. Arrow, 1962, Economic welfare and the allocation of resources for invention, in The Rate and Direction of Inventive Activity, Universities-National Bureau Committee for Economic Research, Princeton University Press, Princeton, New Jersey, p. 618. than example of a homogeneous product market is the market for a firm's stock shares.

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44 The Privatization of Environmental Data long run only a single firm can operate profitably in such a market. Continued profitability requires enforcement of restrictions on the redistribution of products by customers. Once a monopoly is established, prices will exceed marginal costs. As a result, the total number of sales will be lower than they would be if price equaled marginal cost. For public-purpose information, this means a reduction in social welfare. The total cost of the information system is dominated by the costs of making the observations and assembling, validating, and synthesizing them into dependable, scientifically valid, well- documented products. For the shared environmental systems under discussion measurements must be made using a variety of remotely sensed and in situ instruments, positioned both throughout the United States and in other countries, and combined with retrospective data. The infrastructure, communications, and personnel costs of participating facilities are high compared with the cost of disseminating the resulting data and information products.' The cost of making and distributing additional copies of each core product is negligible compared to the cost of generating the master copy. Although this situation has always been the case, copying and distributing data over the Internet or on other digital media has greatly reduced the cost of disseminating data and products relative to printed publications and older media such as microfilm. Costs of storing and accessing large volumes of data electronically continue to decline, making it feasible to copy whole collections of retrospective data, once they are in electronic forrnat.~3 . It is very difficult for a commercial company to recover the cost of generating core products by selling them in a competitive market, without imposing restrictions on their re-use by customers. The following scenario illustrates the negative impact of relaxing Resee C. Shapiro and H.R. Varian, 1999, Information Rules. Harvard Business School Press, Boston, Massachusetts, p. 25. i2An example of the high cost of data collection is given in USGS, 1998, ~ New Evaluation of the USGS Streamgaging Network: A Report to Congress, 20 pp. See also C. Shapiro and H.R. Varian, 1999, Information Rules. Harvard Business School Press, Boston, Massachusetts, p. 3. This is true as long as copying does not involve a transition to new technology. Migrating data to new media is generally very expensive. See NRC, 1995, Preserving Scientific Data on Our Physical Universe. National Academy Press, Washington, D.C., 67 pp.

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Policy and Economic Framework 45 enforcement restrictions on the homogenous market discussed above. Suppose that a commercial organization (the primary producer) is responsible for producing a particular core product and recovering the primary cost of production (say $100,000,000) through sales. For the organization to break even, it must set a sales price at least equal to the primary cost divided by the projected number of sales (say 10,000~. Tn this hypothetical case the minimum sales price would be $10,000 per copy. But what if the conditions of sale did not restrict further reproduction by purchasers? In that case, the product will not be commercially viable. Without such a restriction an intermediary for a group of potential users (say 100 in number) can purchase a single copy at the primary price, reproduce that copy at negligible cost, and recover expenses ($10,000) by distributing a number of copies (say 100) among the group at the greatly reduced secondary price of only $100 per copy. Such "leakage" cuts into primary sales and reduces the total revenue of the unfortunate primary producer. Even worse, the $100 secondary price is also unrealistic, because it is vulnerable to a similar strategy pursued by another intermediary who purchases one copy at $100 but sells 10 copies at $10 each. Such competition can be expected to Tower the street price until there is no possibility of the primary producer recovering even a significant fraction of the total cost of production. Under these circumstances, a Tower limit to the street price is set by the marginal cost of reproduction (i.e., by the additional cost to an intermediary of making a single extra copy). The social return generated from the trunk and roots of public-purpose information systems may dwarf private returns. When a for-profit firm produces and sells data or information, even under patent and copyright protections, it may not capture in its revenues all the value that it creates for society. in this case (by definition) the total return to society exceeds the private return to the firm. Thus it is possible that the private return from a contemplative activity might be less than the cost, in which case the activity would not be undertaken by the firm, whereas the social return might exceed the cost, and hence the activity should be undertaken by society. As an extreme example, private production of a pure public good might yield a large social return but no private return whatsoever. Conclusion. Because of the cost structure of public-purpose environmental information systems and the need for their

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46 The Privatization of Environmental Data scientific validity, the public interest is best served by funding the trunk and roots out of taxpayer resources and by providing fuR and open access to a set of reliable core products presenting factual information that is potentially useful to a broad range of user groups. The Potential for Commercializing Branches The branches provide an opportunity to develop differentiated products markets for which the prospects for rigorous competition are likely to be better. In a differentiated products market several fibs produce similar but distinct products (much like the market for compact cars). ]4 Determining when a competitive outcome is likely involves a two-step analysis. First, the demand and cost characteristics of each product have to be identified to determine the maximum number of products that can be profitably sold. All else being equal, a market in which demand for each product is "large" can support more vendors; conversely, as average costs increase (due to fewer sales over which the fixed costs can be spread) fewer entrants will be expected. In particular, if demand is not adequate to cover the average costs for only one firm, then no private-sector firm will be inclined to enter the market. For example, scientists alone are unlikely to constitute a viable market. Second, once the number of likely participants is identified, the nature of their interaction has to be considered. Intuitively, as the number of firms increases so does the degree of competitiveness. If a market is large enough to support only one firm and thus the sale of a single product,~5 it is likely that the monopoly firm's prices will exceed its costs and thus reduce sales relative to the competitive benchmark. Multiple firms competing in a market are also more likely to create products that meet customer demands for quality and timeliness. i4If it is cheaper for one firm to produce this set of products, compared to several firms each producing a subset, then the analysis reverts to our discussion of homogenous products (i.e., the monopoly outcome). To simplify the discussion we assume here that each firm sells a single product. isIf the full panoply of products were sold in this market by an equal number of firms, demand would be insufficient to cover the costs of each firm. By shrinking the set of products sold, customer demand would be shifted to the product sold by the monopoly firm, allowing it to recover costs.

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Policy and Economic Framework 47 The community of end users of the core products and their derivatives is diverse (see Box 3.3~. It is impossible to envisage all the present and future applications of the information provided by the core products. Hence a flexible system of branches for distributing that information is essential for maximizing the societal benefit of the information system (see also next paragraph). For some communities of end users, competing commercial enterprises that add value to the core products and other sources of information are likely to flourish. Each distinct market delineates a different branch on the information tree. For most end users, factual information in a core product has to be extracted, put in context, and combined with other facts relevant to the purpose at hand. Meeting such needs for a community of similar users can greatly increase the value of the core product itself, presenting a sales opportunity for enterprising intermediaries. In general, the diversity of customer needs and preferences within the community will enable product differentiation and individualized services tailored to those products. The larger the total demand the more competitive the market is likely to be. The specialized skills and market information that are necessary to run such a business successfully are often not available within a government agency. In such cases, private-sector operation of the corresponding branches may be appropriate. On the other hand, public-sector operation of a branch is appropriate when the application is directly related to performance of the agency mission. ~ addition, the scientific research community, which has a noncommercial rewards system, may choose to organize their own branch dedicated to fills and open access and paid for out of research funds. The products created by these basic research branches are likely to spawn additional specialized products as understanding of environmental processes improves or new instruments are developed. As they mature, some of these new products may open new markets for commercial application. Conclusion. Marketing and distribution of core products and creation of value-added products is best provided by a variety of organizations, self-organized to meet the needs of different communities. Some of these value-added branches will exercise proprietary rights to products and services and operate for profit, whereas others will allow full and open access. In the 1

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48 The Privatization of Environmental Data latter case the source offending will depend on circumstances, but may be public, charitable, or commercial. Yet other branches will be maintained by government agencies for public health and safery or operational purposes. Determination of the mode of operation that is most beneficial to society requires a detailed ongoing analysis of the specific circumstances for each branch, taking into account user needs for data access and standards as well as considerations of market size and differentiation. The Potential for Purchasing Data From Commercial Entities Provided certain conditions are met, government agencies may choose to purchase observational data from commercial entities for use in the core products. To be useful for such purposes the purchased data must be free of restrictions on use and redistribution and they must meet stringent quality standards (e.g., calibrated and adequately documented). Any compromises on documentation and openness to scientific audit (see Box 4.1) may materially detract from their value. In addition, the commercial vendor's assurances of a continued supply of data must be sufficient to justify government investment in the preparation of products that make use of them. Under these conditions, a competitive procurement based upon careful specification may lower costs below those of government operation of the same root, and hence be to the public benefit. The principles outlined above for analyzing the competitiveness of . . ~ ~ . . . . 1 homogeneous or d~terent~ated products markets within which such a procurement would take place are still applicable, although the term "product" now refers to the purchased data, and the government is a customer, not a supplier. For a market that is not fully established the information necessary to apply the principles may be incomplete. However, even existing established competition among suppliers is not conclusive evidence that such competition would apply to the government procurement. indeed, the number of suppliers may decline if the government is the sole buyer for a distinct product. This is because the government data policy and quality specifications may be so stringent that they impose substantial costs to a potential vendor, in addition to the same fixed cost of satisfying the needs of other customers. If the government were the sole buyer for this distinct product, a new

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Policy and Economic Framework 49 homogeneous-product market would be created in which only one seller could survive. This conclusion may change, however, if the government were to procure a number of similar but distinct high-quality products. In such a differentiated products market two or more suppliers migh be able to operate successfully. Conclusion. Purchasing full rights to data, including rights to downstream uses, from commercial entities may be an option for meeting specific observational requirements of public-purpose information systems. REQUIREMENTS OF PUBLIC-PURPOSE ENVIRONMENTAL INFORMATION TREES Based on the data policy and economic considerations outlined above, the committee concludes that environmental information systems created purely or partly for public purposes must meet certain require- ments. Essential characteristics of the roots are: scientifically valid observation systems yielding quantitative data placed in the public domain; measurement of multiple variables at nationally and inter- nationally distributed locations by a mixture of directed and volunteer organizations; and public funding with possible purchase of data from the private sector under appropriate circumstances. Characteristics of the trunk include the following: systematic validation and synthesis of data into a limited selection of core information products that directly or indirectly serve all user groups; full and open access (provided without restriction for no more than the marginal cost of reproduction) to these products and the processes by which they are derived; and public funding.

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50 The Privatization of Environmental Data Characteristics of the branches include the following: development based on free or Tow-cost access to core products from the Bunk; value-added products for each distinct branch; a mixture of public domain and proprietary data policies; and multiple operating organizations (e.g., universities, data centers, libraries, commercial vendors, government programs). Such clear-cut distinctions between the trunk and branches do not always exist in practice. Determining which databases are part of the trunk and which are part of the branches must be decided case by case, using the characteristics described above. Most important for the present discussion is a classification that helps maintain full and open access to data required for scientific purposes and helps promote vigorous com- petition where data are subject to proprietary restrictions. Characteristics of the leaves are: great diversity; changing numbers and identities resulting from new, commonly unforeseen uses of environmental information; and rapidly increasing practical importance due to the growing public awareness of environmental issues. Of course, in the real world environmental information systems cannot be described as a single tree or even a grove of trees. Rather, the roots, trunk, and branches of different information systems, some of which are operated by the private sector or commercialized government agencies, are interconnected. Data from an individual instrument may feed into the core products of several trees, which in turn contribute to the core and value-added products of other trees. Users influence in varying degrees the requirements by which several trees evolve. However, the full societal benefit will only be achieved if subsequent uses of data or products from individual trees are permitted freely. information systems designed to fulfill certain public objectives, such as the advancement of scientific understanding, supply products of which the use could be but should not be restricted. Without restrictions no private firm can recover its investment in the information system.

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Policy and Economic Framework 51 With restrictions the private sector can profitably supply information products. Revenue will exceed costs but the low level of unit sales will fait to maximize the net social benefits derived from the information system. In contrast, public agencies can subsidize creation of the system and deliver information at its marginal cost to all potential users, thereby maximizing net social benefit. Recommendation. The practice of public funding for data collection and synthesis should continue, thereby focusing contributions of the private sector primarily on value-added distribution and specific observational systems.

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