10.
Enhancing Access to Government Information: Economic Theory as It Applies to Statistics Canada1

Kirsti Nilsen

University of Western Ontario, Canada


This presentation summarizes a study I did for Statistics Canada, that country’s national statistical agency. The goals of this study were to complete an authoritative view and analysis of current economic theory, to review the literature on the economic theory of information, and to identify elements of the literature relevant to Statistics Canada's dissemination and management of the production of statistics. My focus was on several issues: the impact of information on general economic efficiency; the economic rationale for, and advantages of, public sector supply as opposed to private sector supply of information; economic theory with respect to pricing; the economic rationale for government intervention in the statistical information market; and the appropriate level of production of official statistics. I was also tasked to summarize and review Statistics Canada's production and dissemination program in light of current economic theory and to identify areas where I thought that the agency's production program could be improved.


In reviewing the literature, I first focused on economics broadly and then looked in more depth at the economics of information. While there is an abundance of theoretical literature on the economics of information, there is very little on the economics of public sector information and almost nothing on the economics of official statistical information.


It is worth noting that theoretical economists do not focus on the financial situation of individual organizations, so if an agency like Statistics Canada is efficient and claims to be making money and covering its costs, it is not their concern. These theorists work at a broader level and are concerned with the economic and social welfare of society as a whole. They look not only at economic efficiency but also at the larger questions, What is the social benefit? What is the social welfare?


The belief among economists is that economic efficiency is achieved when goods and services that are produced actually exchange hands, avoiding wasteful overproduction and fulfilling consumer wants, desires, or preferences. Conversely, it is economically inefficient if agencies or organizations produce information that does not exchange hands and if there are desires that the consumers have that could be satisfied by PSI producers but that are not being fulfilled by them.


Theoretical economists also consider externalities, or spillovers, in their analyses. They care about positive externalities, while remaining aware of the butterfly effect, which refers to the way that a very small bit of information can have large downstream impact. Furthermore, they argue that cost recovery through such mechanisms as user fees is never welfare enhancing. This conviction is repeated over and over in the literature. Economists believe instead that taxation has distributive benefits across society (cf., Joseph Stiglitz).

1

Based on a presentation found at http://www.oecd.org/dataoecd/12/32/40066153.pdf



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10. Enhancing Access to Government Information: Economic Theory as It Applies to Statistics Canada1 Kirsti Nilsen University of Western Ontario, Canada This presentation summarizes a study I did for Statistics Canada, that country’s national statistical agency. The goals of this study were to complete an authoritative view and analysis of current economic theory, to review the literature on the economic theory of information, and to identify elements of the literature relevant to Statistics Canada's dissemination and management of the production of statistics. My focus was on several issues: the impact of information on general economic efficiency; the economic rationale for, and advantages of, public sector supply as opposed to private sector supply of information; economic theory with respect to pricing; the economic rationale for government intervention in the statistical information market; and the appropriate level of production of official statistics. I was also tasked to summarize and review Statistics Canada's production and dissemination program in light of current economic theory and to identify areas where I thought that the agency's production program could be improved. In reviewing the literature, I first focused on economics broadly and then looked in more depth at the economics of information. While there is an abundance of theoretical literature on the economics of information, there is very little on the economics of public sector information and almost nothing on the economics of official statistical information. It is worth noting that theoretical economists do not focus on the financial situation of individual organizations, so if an agency like Statistics Canada is efficient and claims to be making money and covering its costs, it is not their concern. These theorists work at a broader level and are concerned with the economic and social welfare of society as a whole. They look not only at economic efficiency but also at the larger questions, What is the social benefit? What is the social welfare? The belief among economists is that economic efficiency is achieved when goods and services that are produced actually exchange hands, avoiding wasteful overproduction and fulfilling consumer wants, desires, or preferences. Conversely, it is economically inefficient if agencies or organizations produce information that does not exchange hands and if there are desires that the consumers have that could be satisfied by PSI producers but that are not being fulfilled by them. Theoretical economists also consider externalities, or spillovers, in their analyses. They care about positive externalities, while remaining aware of the butterfly effect, which refers to the way that a very small bit of information can have large downstream impact. Furthermore, they argue that cost recovery through such mechanisms as user fees is never welfare enhancing. This conviction is repeated over and over in the literature. Economists believe instead that taxation has distributive benefits across society (cf., Joseph Stiglitz). 1 Based on a presentation found at http://www.oecd.org/dataoecd/12/32/40066153.pdf 40

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ENHANCING ACCESS TO GOVERNMENT INFORMATION 41 According to economists, public goods are goods that can be consumed by many without detracting from the benefits enjoyed by others. Public goods are nonrivalrous and nonexcludable. That is, their use by some consumers does not affect their availability to other consumers and no one can be excluded from using them. The classic example of a pure public good is the lighthouse, whose benefits are available to anyone and everyone. Public goods can also be produced by the private sector (which is counterintuitive to most people), with the classic example being the newspaper. While produced by the private sector, the information in a newspaper is nonrivalrous and nonexcludable. No newspaper publisher can keep me from passing on to others the information I read this morning. However, the private sector does not in general produce enough of these goods for which there is no market or sufficient revenue, and very often these are the goods with social benefits. It is this situation that underlies the justification for the public sector supply of public goods. Some public goods can be made rivalrous and excludable, with education being a classic example. While information is almost always nonrivalrous, it may be made excludable by pricing, copyright, or failure to provide access electronically or in print. Pricing of nonrivalrous public goods, such as information, is never economically efficient because some people will be prevented from enjoying the benefit of the good even though their consumption of the good would have little or no marginal cost to the producer. Pricing implies that information is a commodity, but information’s characteristics make such a categorization problematic—information’s content is easily shared, resistant to appropriation, and difficult to measure. Attempting to value information is challenging, because once information is disseminated, it can be spread around and have immense and often unanticipated downstream effects. For all of these reasons, information is difficult to cost and to price. Moreover, wider dissemination of information does not increase the costs to the producer. This situation makes possible the monopolistic provision of information goods by those who can take full advantage of the economies of scale. (cf., Carl Shapiro and Hal Varian). Economists recognize that private sector monopolists underproduce and overprice their goods and that public sector information producers are usually monopolists. Economists also argue that pricing above the marginal cost of dissemination is inefficient because it results in a deadweight loss and eliminates the consumer surplus. Consumer surplus can be thought of as money left over because a good cost less than expected: If a person has set aside $50 to buy a shirt, and the shirt is actually bought on sale for $25, the consumer surplus is $25. Consumer surplus is economically efficient because consumers will generally take that $25 and do something else with it that is good for the economy. They may buy another item or invest the money. This consumer surplus is lost when prices are set above marginal cost. Furthermore, such pricing means that some items will be produced and not sold, which is economically inefficient, or else units that have benefits greater than their cost will not be purchased. Economists agree that there is no net social benefit to charging above marginal cost. When the public sector does impose user fees for information, it claims that they are based on marginal cost or on cost recovery pricing. The question is, What is being included in the marginal cost? Some of the literature indicates there is a long-term marginal cost and a short-term marginal cost, but what is the difference? It appears that

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42 SOCIOECONOMIC EFFECTS OF PSI ON DIGITAL NETWORKS long-term marginal cost is another way of saying full cost, or cost-recovery pricing. But the problem remains: How are the costs determined? Do you include the lights? The air conditioning? The price, then, is always a political decision—and arbitrary. According to economists, there is no way to price information in an objective manner. So why does the public sector want to impose fees? The basic answer is that it is to recover costs and generate revenue. Beginning in 1984-1985, the Canadian government imposed cost recovery and revenue generation on government agencies, and while this has been the operational model ever since, various agencies are now moving away from it (which is why Statistics Canada wanted this study done). The justification for cost recovery is often based on the so-called benefit principle: Those who benefit from a good should pay for it. However, it is very difficult to determine the benefits of information. Information flows. It moves away from the initial buyer. So, what is the benefit? Who benefits? How do you apply the benefit principle? The assignment of benefit, like the assignment of costs, is an arbitrary exercise. Some countries impose copyrights on PSI. This, too, must certainly have unanticipated downstream consequences. For example, what happens to countries, such as Canada, that impose Crown copyright on their information when they trade with other countries, such as the United States, that do not? Are Canadian businesses on a level playing field with American businesses in our competitive trade market? No. To be sure, the main argument for retaining copyright is that it ensures the integrity and authority of the information. Elizabeth Judge, who is a legal scholar in Canada, thinks that as a means of ensuring PSI integrity and authority, copyright is very much a blunt instrument. In Canada, for instance, the moral rights provisions of the Copyright Act are sufficient to ensure PSI integrity and authority, and it is not necessary to impose Crown copyright. The copyright acts in many countries in the European Union include moral rights provisions. Of course, the real reason that some countries retain copyright is to generate revenue on the initial information and on any value added to it. Imposing copyright allows PSI providers to benefit from adding value to their own information or from licensing others who wish to add value. Economists have concluded that Crown copyright has social costs and a negative economic impact. Stiglitz, Orszag, and Orszag (2000) argued that if a government role is warranted in any activity, then seeking to generate revenue means that an agency is not fulfilling its mission. And if no government role is warranted, the activity should be undertaken by the private sector. Thus it is a proper government role to provide public data and information to support basic research and to improve the efficiency with which the services of government are provided. However, Stiglitz, Orszag and Orszag also argued that PSI providers should exercise caution in adding specialized value to public data and information beyond a basic level. If there is a need for specialization, then it probably should not be done by the public sector, and the cutoff should come at the point when the marginal costs become high. Governments should leave high marginal cost activities to the private sector. Furthermore, PSI providers should only provide a service online when a private service

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ENHANCING ACCESS TO GOVERNMENT INFORMATION 43 would not be more efficient, taking into account privacy, security, and consumer protection. In the digital economy, private markets may produce substantial income inequality and excessive investment because of attempts to become the best in a specific field, which leads to the markets becoming inefficient from a social perspective. Because of its high fixed costs and its low marginal costs, the production of information is always at risk of having limited competition. To avoid this, competition must be encouraged, which will lead to lower prices, which in turn benefits the entire society. Otherwise, given the high fixed costs and low marginal costs, it is likely that monopolies will develop. Stiglitz, Orszag and Orszag conclude that the theoretical underpinnings of the private–versus-public situation shifts as the economy moves toward a digital one. Although it may seem to be inconsistent with the laissez-faire approach to economic efficiency, this movement toward a digital economy implies an expansion of public goods and suggests a larger public role in the digital economy. What are the implications for PSI providers, such as Statistics Canada, of moving to free dissemination? Statistics Canada is an entrepreneurial agency whose budget benefits from the sale of its data. I understand that there is a ground shift going on, with the agency considering a move towards free (or less restricted) dissemination. While one can predict that the agency’s sales and licensing revenues will decrease, it is also true that usage and reuse will increase. Increased usage would have positive externalities in terms of information dissemination and the uses to which people will put the data, and it will also have a positive economic impact for the country as a whole, ultimately leading to increased tax revenues that are generated by the use and reuse of PSI. At the same time, the agency's transaction and opportunity costs will decrease. A great deal of money and time is currently spent determining prices, negotiating and administering licenses, and monitoring where sales revenues are coming from, who is paying, and who has not paid. Furthermore, much time and money is spent negotiating with other government departments over cost recovery charges for information, which generates a great deal of wasted transaction costs and produces no new revenues for the government as a whole. That money could be put to other uses. I conclude that the decreases in transaction and opportunity cost will more than compensate for the revenue decrease; meanwhile, there will be a positive economic impact for the country from increased use of the data and the tax revenue increases resulting from private sector reuse. Overall this outcome will result in increased economic efficiency and a greater net social benefit. REFERENCES Judge, E. F. 2005. Crown copyright and copyright reform in Canada. In In the Public Interest: The Future of Canadian Copyright Law, edited by M. Geist. Toronto: Irwin Law. Pp. 550-594.

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44 SOCIOECONOMIC EFFECTS OF PSI ON DIGITAL NETWORKS Shapiro, C., and H. Varian. 1999. Information Rules: A Strategic Guide to the Network Economy. Boston: Harvard Business School Press. Stiglitz, J. E. 1994. Whither Socialism. Cambridge, MA: MIT Press. Stiglitz, J. E., P. R. Orszag, and J. M. Orszag. 2000. The Role of Government in a Digital Age. Washington, DC: Computer and Communications Industry Association.