Why do we need privacy laws in a free market

Updated: Dec 21, 2021

Informed decisions are the cornerstone for the protection of personal information. However, for a user to make informed choices and have meaningful control over their personal information, it is essential to have a robust legal framework for the protection of personal information.

Free markets and deregulations ensure the greatest benefits for consumers through resource allocation to their highest-valued uses. However, this does not hold true in an imperfect market where consumers lack key information about the characteristics of the offered goods and services. Such information asymmetry where consumers are not fully aware of the nature, extent, and method of the companies’ data collection process, necessitates government intervention through privacy regulations for protecting consumers’ privacy interests. According to a study, only 8% of all U.S. adults understood the privacy policy they were reading, and only one in five Americans often or always read privacy policies before accepting them [1].

Proponents of the free market would argue that market competition would compel companies to provide complete and fair information to their consumers. Dissatisfied consumers will shift to a competing company that provides more accurate and complete information if a company fails to do so. However, consumers typically lack a basic understanding of privacy settings. Consequently, they fail to evaluate how various companies collect, process, and distribute their personal information. Therefore because of this information asymmetry, consumers fail to choose between competing products and services based on their privacy preferences. This necessitates paternalistic intervention by the government through privacy regulations to ensure a fair market and hand back the control to the consumers over their personal information.

[1] Brooke Auxier, Lee Rainie, Monica Anderson, Andrew Perrin, Madhu Kumar and Erica Turner, Americans’ attitudes and experiences with privacy policies and laws, Pew Research Center (November 15, 2019)