The economics of privacy, data protection and surveillance

Economists have investigated a range of questions regarding individual and business decisions related to the use of personal information, as well as the possible contours and effects of privacy regulation. More recently, behavioral economists have tried to understand the factors underlying the ‘privacy paradox’ – that individuals commonly claim to be concerned about privacy, but behave in ways that seemingly contradict that claim. This chapter first describes the standard economic analysis of privacy, data protection and surveillance, looking at the costs and benefits to different parties and the incentives each therefore has, as well as the aggregate social welfare impacts of their decisions. It then considers the market failures that can lead to non-optimal outcomes, including information asymmetries, negative externalities, and cognitive biases of individual decision-makers. Finally, it analyzes the economic impact of various regulatory options for correcting these market failures, an important consideration given that most advanced and many emerging economies now have extensive systems of regulation in this area.