2 Regulation 19 (1978)
Economic Theory of Privacy

handle is hein.journals/rcatorbg2 and id is 131 raw text is: AN ECONOMIC THEORY
OF PRIVACY
Richard A Posner

MUCH INK has been spilled in trying to
clarify the elusive and ill-defined con-
cept of privacy. I will sidestep the
definitional problem by simply noting that
one aspect of privacy is the withholding or
concealment of information. This aspect is of
particular interest to the economist now that
the study of information has become an im-
portant field of economics. It is also of interest
to the regulator, and those affected by him, be-
cause both the right to privacy and the right to
know are becoming more and more the sub-
ject of regulation.
Heretofore the economics of information
has been limited to topics relating to the dis-
semination and, to a lesser extent, the conceal-
ment of information in explicit (mainly labor
and consumer-good) markets-that is, to such
topics as advertising, fraud, price dispersion,
and job search. But it is possible to use eco-
nomic analysis to explore the dissemination and
withholding of information in personal as well
as business contexts, and thus to deal with such
matters as prying, eavesdropping, self-adver-
tising, and gossip. Moreover, the same analysis
may illuminate questions of privacy within or-
ganizations, both commercial and noncommer-
cial.
I shall first attempt to develop a simple
economic theory of privacy. I shall then argue
from this theory that, while personal privacy
seems today to be valued more highly than or-
Richard A. Posner is professor of law at The Law
School of the University of Chicago. A consider-
ably fuller version of this paper appears under the
title The Right of Privacy in the University of
Georgia Law Review, May 1978.

ganizational privacy (if one may judge by cur-
rent legislative trends), a reverse ordering
would be more consistent with the economics
of the problem.
Theory
People invariably possess information, includ-
ing the contents of communications and facts
about themselves, that they will incur costs to
conceal. Sometimes such information is of
value to other people-that is, other people will
incur costs to discover it. Thus we have two
economic goods, privacy and prying. We
could regard them as pure consumption goods,
the way turnips or beer are normally regarded
in economic analysis, and we would then speak
of a taste for privacy or for prying. But this
would bring the economic analysis to a grind-
ing halt because tastes are unanalyzable from
an economic standpoint. An alternative is to
regard privacy and prying as intermediate rath-
er than final goods-instrumental rather than
final values. Under this approach, people are as-
sumed not to desire or value privacy or prying
in themselves but to use these goods as in-
puts into the production of income or some
other broad measure of utility or welfare. This
is the approach that I take here; the reader will
have to decide whether it captures enough of
the relevant reality to be enlightening.
Not So Idle Curiosity. Now the demand for pri-
vate information (viewed, as it is here, as an in-
termediate good) is readily understandable
where the existence of an actual or potential

REGULATION, MAY/JUNE 1978 19

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