In a joint submission to the Government’s discussion paper on online piracy, made public yesterday, Professor Henry Ergas and Professor Alan Fels argue that proposed changes have the potential to impose “costs that greatly exceed their benefits.”

Ergas and Fels are two of Australia’s best know economists. Ergas was on the Vertigan panel, which conducted the recent NBN cost benefit analysis, and Fels is a former head of the Australian Competition and Consumer Commission (ACCC).

They argue that the Government’s proposals, which will make it the responsibility of the Internet service provider (ISP) to identify and take action against individuals engaged in copyright infringement, will

By extend ‘authorisation liability”, and will place on ISPs and on a broad range of other entities, including cloud service providers, schools and libraries, “risks they are poorly placed to manage. This inefficient allocation of risk will increase costs for end-users and chill innovation.”

Their submission, on behalf of the Australian Interactive Media Industry Association (AIMIA), can be found here. It is strongly argued.

“International experience is uncertain as to whether graduated response schemes are even effective – i.e. whether they result in a reduction in infringement. What is clear, however, is that there are strong grounds for questioning whether they are efficient: that is, whether they result in benefits that outweigh their costs.

“As well imposing a substantial burden in terms of compliance costs, these schemes impose costs on end-users in the form of ‘false positives’. False positives are likely to be pervasive in any graduated response scheme in which there is not effective prior judicial scrutiny of the triggering of the notice process and in which rights owners do not bear the full costs of the process, including the costs imposed on innocent end-users.

“In that event, rights owners will have incentives to make excessive use of the process, imposing a negative externality on end-users.

“To make matters worse, the gross imbalance in resources between corporate rights owners and their collective organisations on the one hand and individual end-users on the other, along with the fact that rights owners have far greater incentives to bear the costs and risks of litigation than do individual end-users, reduces (if it does not virtually eliminate) the likelihood of notices being successfully challenged, even when they are inaccurate.”

The Ergas-Fels submission is unlikely to be welcomed by Malcolm Turnbull or the Government, which has argued in favour of the ISPs taking a greater role. Ergas in particular is known as a supporter of Government policy in many areas, particularly the NBN, and to hear this criticism from him will hurt.

“That the vast bulk of the increased revenues will flow to overseas rights owners, for whom it will amount to a small proportionate rise in profits, only makes that inference stronger. Moreover, in the cost-benefit methodology applied by the Productivity Commission and mandated for other Australian Government entities, those payments overseas are treated as a cost to the Australian economy, further reducing the likelihood of a net benefit.”

They couldn’t be much clearer. The proposed changes ti the copyright enforcement regime will increase risks to ISPs, and therefore increase their costs, which will be passed on to consumers.

But those who benefit from a more restrictive regimen – the rights holders – will not have to bear the costs. And their increased revenues, because they mostly go offshore, will in  effect be a further cost on consumers.

Ergas and Fels also say the Government’s proposals will lead to more legal uncertainty, not less.

The bottom line: “The economics of copyright are such that the proposals are not likely to reduce piracy, and instead may lead only to increased costs for Australians which significantly outweigh any theoretical benefits to copyright holders.”