I’ve been thinking of externalities and by far the hardest form of an externality example to come up with has to be a “positive production externality”. That is, where the production of a good or service has a beneficial spillover effect for the rest of society’s producers. I came across an older post by Jason Welker where he speaks of the difficulty in providing examples. In that post he quotes economics professor Dr. Tim Haab who had this to say about PPEs:
The problems usually come in defining a positive production externality. A benefit to someone that is not fully captured by the producers–usually difficult because producers are usually pretty funny about finding ways to recover the full benefits of their production.
The case of proprietary software provides evidence for this claim. When proprietary software is published, it uses trade secret, patent and copyright laws to keep other producers from benefiting fully from the spillover. For example, trade secrecy keeps useful source code hidden from 3rd parties. Patent laws can keep 3rd parties from implementing similar ideas in their programs. As well, non-disclosure agreements are used within companies in an attempt to stop any benefit from “leaking” to other producers. Proprietary software production is an allocatively inefficient deployment of resources (historically justified under the fallacy that quality software won’t be written otherwise) and represents a market failure.
In the case of Free software production, the PPE isn’t negated by NDAs and patent thickets. With Free software, all producers are affected by the benefit. Non-copylefted Free software brings the marginal private cost (MPC) curve closer to the marginal social cost (MSC) curve while copylefted Free software aligns the two even closer as producers are unable to prevent others from acquiring the same benefits they received. Therefore, it makes the most sense for government policies to support businesses and other institutions in a way that encourages even more development of Free software.
On a related but unfortunate note, countries like Germany are trying to correct a negative consumption externality of proprietary software. Specifically, the burden of malware. Promoting Free software also tackles this problem as Free software offers users the best defense against malicious code.