The Inefficiencies of Upholding the Law...

From a post by Ashby Jones at The Wall St. Journal law blog a few days back:

'Well, we can’t say it’s the sole attraction offered by New York City, but we certainly know some people who’ve traveled here just to pick up the knockoff Gucci and Kate Spade bags sold in various parts of downtown Manhattan.

Such an activity could soon come with a bit more risk than it used to be, that is, if NY city council member Margaret Chin has her way.

According to stories at the AP, WNYC, Epoch Times, Chin is set to introduce legislation on Thursday that would criminalize the purchase of fake and trademarked items. Buying such items would attach a class A misdemeanor that could include either jail time or a $1000 ticket.'

This is a piece of legislation that just screams for a bit of economic analysis. While most people would agree that enforcing laws, including trademark laws, is a good thing, there are times when laws do not do what they are intended to do, or perhaps have unintended consequences. In other words, putting aside any notions of legal justice or fairness, economists might say that some laws are 'bad' based on economic analysis. While many people believe that in a conflict between economics and fairness the latter should clearly come out on top, let's run this one through the wringer and see what we can come up with.

First, let's think about what trademark laws are supposed to do. In the case of bags, they are intended to protect the makers of the bags from counterfeiters who would undercut the often high prices that are charged for their products. There is also brand value created when members of a certain class cannot afford such luxury goods; in other words, there is some value producers can put on their brands being 'exclusive' and some value their clients in turn receive when they purchase and use such goods.

Others have a stake in this brand protection as well. Countries put trademark laws in place to product producers in their jurisdictions as well as to create a legal regime that is amenable to business interests. For example, Louis Vuitton does not typically rush to set up flagship stores in third world countries (aside from obvious demand problems in such places) which have no legal protections for its intellectual property. However, such luxury goods producers do set up shop in countries and locations with strongly protective legal regimes (as long as there are potential consumers there as well).

This is presumably the reason why this bill is being presented; to make New York a more welcoming place for luxury goods sellers. On that analysis the law would appear to be unnecessary; New York City is not a third world country starved for luxury goods outlets, it is already a shopping mecca which receives tax dollars from hosting luxury brands retailers as well as tourism dollars from those who come to purchase them. In other words, despite sometimes lax enforcement of trademark laws, NYC does not have trouble attracting luxury brands. Things appear to be going just fine.

Of course this is because it is where the dollars are; sensible producers would be foolish to forego the selling opportunities that the well-heeled of the Big Apple present. So maybe this makes New York a special place with regards to trademark protection analysis. If that is the case, then maybe the logic regarding trademark protections above doesn't hold for New York. Perhaps it requires its own legal regime for trademarks. Since the current state of affairs is a city with a thriving high street despite the presence of counterfeits, maybe this legal regime includes relatively lax enforcement.

On the other end of the spectrum, New York has a thriving black market in counterfeit luxury goods. This is best represented by the Canal Street area downtown. I can personally attest to the fact that this business is a brisk one, and many of the potential buyers are indeed from out of town. Though New York might not get as much tax revenue from the stalls on Canal Street as it does from more prestigious addresses on Fifth Ave, it is still true that Canal Street is a part of the New York experience for many. And while those out-of-towners are making a trip to buy the slightly less-than-authentic versions of this year's hottest bags, they are also buying lunch, getting a coffee, seeing the sights, grabbing drinks and using transportation. All of these activities eventually mean money in the city's coffers.

So there are two big reasons to avoid passing the proposed legislation; New York is already favorable enough for luxury goods sellers due to the income of its residents, and getting rid of the knock-off market would mean decreased revenues for the city. Is there any reason to pass such a law? Economics aside, perhaps New York wishes to be seen as a good partner to luxury vendors within its bounds. Perhaps the realities of the global counterfeit supply chain are discomfiting to New York's City Council. Maybe the Council just wants to 'do the right thing.'

However, even if those goals are meritorious, and even if passing the law serves the interests of justice, this is clearly one case where the economics don't stack up. The economics say that this is probably a 'bad' law. Maybe in a bad economy, this should be dispositive. Maybe it is just a single piece of the puzzle the Council will use as it analyzes the bill. Maybe it shouldn't matter at all. In any case, this situation is clearly a good example of how laws, even when just, can create clear inefficiencies in an economic system.

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