Economic Analysis of Privacy in the U.S. legal System

The theory of Economic Analysis of law, sometimes interpreted as the theory of Law and Economics, is one of the important theories about the relationship between Law and Economic that first exposed to discuss in the United States and then in other countries in the second half of the 20th century. According to this theory, increasing economic efficiency and maximizing wealth are the basis for evaluation and the aim of the law. One of the issues increasingly has attracted economists and lawyers' attention in the information economy is privacy. Although there are different definitions of privacy, all of them are related to the boundaries between the self and the others or in fact between private and public. In this article in order to determine the optimal level of government intervention and to present a definitive economic assessment of whether more or less, privacy protection is required, we compare the aggregate values of privacy protection and disclosure of personal data (lack of privacy protection) and the economic implications of them by analyzing diverse streams of theoretical on the economics of privacy as well as privacy tradeoffs for data holder, data subjects, and third parties.
 

The method for collecting information is a library method. We studied statutes, regulations, cases as well as articles and books about this topic. In this comparative study, the method of thinking is the descriptive-analytical method.
 

Chicago School's scholars believe privacy protection as the source of economic inefficiencies. The reasons for these inefficiencies also has expressed as follows: hiding information from other economic agents, increased transaction costs, hiding negative features, the difficulty of transaction risk analysis and fraud encouragement. It is also said that free information sharing leads to reduced market distortion, increased social welfare, and consumer interests from positive externalities of the second market. Finally, privacy protection depends on the valuation of the parties interested in certain data not on the regulatory protection of personal information. In criticizing this theory we can say that the assumptions of rational behavior (considering the current technologies) can't take into account the complexity of consumer's decision making. First of all, the consumer sometimes cannot predict the future effects of the current information sharing (for example, the negative externality of secondary market, price discrimination, utilization of data for unsolicited marketing and the other negative consumer externality that is not internalized by the firms). Second, at the time of choosing the short term benefits and the long term costs of information disclosure, the consumers do not act properly. Privacy also has a positive effect on welfare and efficient balance in source allocation. Moreover, in rejecting the theory of efficiency in the free flow of information we can say that such a system would be inefficient in the long term. Because information about an individual is never complete or accurate. If an individual has no control over the dissemination of her personal information, does not know what facts may determine a counterparty’s decision, and he can't correct errors in her record, that may lead to economically inefficient behavior by all parties to a transaction. Finally, people may not acquire privacy protection under standard market conditions due to poverty, transaction costs and other impedimenta.Disclosed personal information (the lack of privacy protection) has economic benefits and costs for three groups of people: data holders, data subjects and third parties. disclosed personal information can bring about economic benefits for data holders (for instance, efficiency gains, price discrimination, increased revenues through consumer tracking, improved services or its redesigning with respect to consumer behavior); data subjects (for instance, discounts, personalization, sales of personal information with prophetization approach, targeted offers, reducing junk and telemarketing and increasing the reliability of gathered data, price discrimination, the advantages of secondary markets) and third parties(for instance, improve  the experiences of third parties). At the same time, such disclosures can be costly for data holder (for instance, costs associated with data collection when consumers deem gathering method too intrusive or the costs associated with the use or misuse of collected data, such as privacy violations, the cost of informing consumers of a breach, termination of relationships with a company and reducing certain transactions because of fears of future privacy costs as well as costs associated with the act of collecting data such as the investments necessary to build Customer Relationship Management systems); data subject (for instance, the psychological costs including unpleasant feelings of being observed, Being afraid of invasion, the embarrassment due to disclosing data; identity theft; price discrimination; changing the balance of power between the data subject and the data holder; time costs including time spent deleting junk mail and even criminal charges) and third parties (for instance, disclosure of third parties' information and their privacy violations).Similarly, protected personal information (privacy protection) has benefits and costs for data holders and data subjects that are often in inverse ratio to the benefits and costs of disclosed data. Privacy protection can lead to economic benefits for data holders (for instance, limiting responsibilities, gaining competitive advantage by attracting consumers who value for privacy) and data subjects (for instance, reducing the expected costs of future identity theft, the benefits arising from the seller's lack of awareness of some personal information). Also, privacy protection may include costs for data holders (for instance, opportunity costs such as the loss of opportunities for increased efficiency as well as the costs associated with the act of protecting data such as investments necessary for data encryption) and data subject (for instance, cognitive costs associated with getting informed from breach and response to a breach disclosure, opportunity costs for not using data in useful individual and social aims, as well costs associated with the act of protecting data including costs of using privacy enhancing technologies).

Considering the analysis presented, it was concluded that the meaning and scope of privacy, its associated trade-offs and consumer's valuations of personal data are very diverse. Furthermore, the benefits and costs arising from the protection of privacy and personal data sharing would be different depending on different circumstances, conditions and assumptions. Finally, economic theory also shows that as much as the interruption of data flows can decrease aggregate welfare, the protection of privacy can increase it. So, it would be difficult to compare the aggregate values of privacy protection and personal data and to present a final and definitive economic assessment of whether more or less, privacy protection is required. Therefore, it seems that solving the privacy problem means to find a balance between privacy and information sharing that is for the benefits of data subjects and society. Evaluating privacy from an economic perspective can help us to find this balance. Additional research is needed to find a way of creating such a balance in this area.