Market Failure

The downside of Free Software: Because it's free, the market doesn't work in the same way as for most commercial products. Some software, even the essential plumbing of the Internet on which we all depend, becomes an externality, and that makes it a problem.

What's an externality? It's a cost that you bear, or an advantage that you enjoy, that you haven't paid for. If a factory pollutes a river and the fishermen downstream find that their catch declines, that's an example of a negative externality affecting the fishermen.

The Free Software economy abounds with positive externalities, but the one that's got me thinking this month is GnuPG, the encryption software used by everyone and everything. It's fundamental to the Internet, in that Linux distros running 90-odd percent of the world's web servers use it to verify software updates. Without GnuPG, the Internet would need to come up with another way of keeping its servers up to date, which would cost money and effort. The money it saves – the trust it engenders – would be worth billions of dollars if only we could quantify it.

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