15 March 2006

I’m going to file this under useful concepts. I learned it from Bruce Schneier who is a very thinker about security and puts out Cryptograms, a thought-provoking e-mail newsletter about security issues. (His take on security is not the predictable, screw down the hatches and put away yer civil liberties point of view.)

Externality is the idea that a transaction cost is born by someone external to the transaction. So, for instance, there’s no incentive for a company that holds personal information on you to do much to prevent it being stolen if there are no consequences to them if it is stolen. If I’m the only one to suffer a negative consequence if my identity is stolen from a company I shared my information with and that company doesn’t have to face a penalty, then the cost of losing my information is an externality for them.


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