Question

Using the basic demand and supply model as the foundation of your analysis, and importantly the concepts of consumer surplus and producer surplus, explain how the arrival of illegal P2P file-sharing technologies impacted the market for recorded music. In addition to relevant economic theories and concepts, you should also discuss some of the ethical issues that relate to illegal downloading.

Answer 1

Initially the equilibrium is at e but with illegal file sharing technologies demand decreases as people can download for free. This shifts demand curve leftwards resulting in new equilibrium at e'. From the graph it can be seen that both producer and consumer surplus have decreased. But decrease in consumer surplus does not affect consumers because they getting files from illegal sources. Producers on the other hand are adversely affected because they are selling less at even lower prices.

It is ethically wrong. It is like you are stealing files without even paying the rightful owner of the files. The owner incurred cost for producing files and is not getting paid for his expenditure.

This also reduces their incentives to produce output which will reduce gdp in the long run.