On May 10, 2010, a New York district judge ruled in a copyright infringement lawsuit against the popular file-sharing website LimeWire and in favor of the 13 major record companies that had brought the lawsuit. The record companies, including Sony, Virgin, and Warner Brothers, had alleged that the file-sharing service encourages users to make illegal copies of copyrighted material. Allowing Internet users to obtain music for free limits the record companies' right to dispose of the music as they choose; in particular, it limits their right to give access to their music only to those who have paid for it. In other words, it limits the record companies' property rights.
a. If everyone obtained music and video content for free from websites such as LimeWire, instead of paying the record companies, what would the record companies' producer surplus be from music sales? What are the implications for record companies' incentive to produce music content in the future?
b. If the record companies had lost the lawsuit and music could be freely downloaded from the Internet, what do you think would happen to mutually beneficial transactions (the producing and buying of music) in the future?