Consumer Information use and Misuse in Electronic Business: An Alternative to Privacy Regulation

The U.S. government and commercial sector have opted to use privacy regulations to control the problem of consumer information misuse in the E-business environment. The authors argue that this is undesirable because it does not correct the market failure that causes this “information externality.” Using the Coase theorem, the authors propose that the market failure can be corrected using either property rules or liability rules and that liability rules at a federal level are likely to be most socially efficient. Recommendations for voluntary actions by industries and companies are also provided.