A non-tragedy

After recent record-breaking denial-of-service attacks, Bruce Schneier wants regulation, to “Save the Internet from the Internet of Things”:

The market can’t fix this because neither the buyer nor the seller cares… the original buyers only cared about price and features… insecurity is what economists call an externality: it’s an effect of the purchasing decision that affects other people.

Any casual student of economics will recognize “externality” in this context as an allusion to the more sensationally-named “tragedy of the commons”, first proposed by William Lloyd, in his paper, “Save the Street from the Horses [paraphrased].” Lloyd explained that if Alice, Bob and Charlie share a common resource, like a street, Charlie might buy more horses than he should. Charlie wants to show off by having the carriage with the most horsepower and, since he doesn’t have to clean up the poop, Charlie buys horses without consideration of the pollution they cause. Bob, meanwhile, bears the cost, as he soils many coats on horse manure, tossed chivalrously below Alice’s feet.

Bruce Schneier argues that the economics of devices like Internet-enabled Pooper Scoopers (iScoop app lets you play back in slow-motion!) inevitably must destroy the Internet the way Charlie’s horses wrecked the street.

Problem is, the assumptions are wrong. Bruce claims buyers don’t care if their devices are secure, but most people I know do care. That is anecdotal, but consider also that antivirus companies make lots of money, thus it is clear that people are willing to pay for computer security.

Second, the argument is imprecise. If we are to say that there is a negative externality, we must identify what harms whom. In a follow-up piece and his testimony (pdf) to Congress, Bruce reiterates but adds little detail:

The owners of those devices don’t care. They wanted a webcam —­ or thermostat, or refrigerator ­— with nice features at a good price. Even after they were recruited into this botnet, they still work fine ­— you can’t even tell they were used in the attack… the insecurity primarily affects other people.

What other people, and how much? This presumably implies that the targets of the attacks – Krebs and Dyn – suffer the externalities while the owners of the subverted devices don’t suffer at all. That assertion that should be obviously false. If aunt Millie’s cat cam participates in crashing Friendface for a day, aunt Millie does suffer: she can’t post her funny cat videos.

Device owners then, certainly do bear some cost of their device ownership. Now, there can still be negative externalities – Charlie, after all, bears some of the cost of owning his horses, as he is not immune from stepping in dung any more than the next guy.

That’s just how real markets are: messy. Many – perhaps most – transactions cause externalities. Sometimes the externalities are significant enough to warrant correction, by measures like Pigovian taxes. Such corrections often cause other problems.

Imprecise analysis leads to solutions that do more harm than good. Schneier should know this; he frequently argues against over-broad legislation, such as the Digital Millenium Copyright Act. He should appreciate the need for care as described by Tim Harford, the Undercover Economist, on keyhole economics:

Keyhole surgery techniques allow surgeons to operate without making large incisions, minimizing the risk of complications and side effects. Economists often advocate a similar strategy when trying to fix a policy problem: target the problem as closely as possible…

Without an obvious way to measure security, how can we calibrate a tax on insecurity? The significant market failure, if any, is that consumers can’t measure how secure their devices are: imperfect information, not externalities.

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