Cybercrime as a Market Failure: A Welfare Economics Framework for Understanding Consumer Surplus, Producer Surplus and Deadweight Loss in the Digital Economy

Abstract

Digital technologies have revolutionised global commerce, communication and delivery of services, and similarly have increased the nature and complexity of cybercrime. Most research on cybercrime focuses on direct monetary losses, cybercrime security spending, loss of productivity, and macroeconomic effects, and overlooks the ramifications of economic welfare. It is this shortcoming that this paper seeks to correct by outlining a novel framework for welfare economics analysis to conceptualise cybercrime as a market failure which causes a loss of consumer surplus, producer surplus, and overall social welfare via the deadweight loss. This paper is based on welfare economics, information asymmetry theory, externality theory, and builds a conceptual model on how cyber threats destroy consumer trust, create transaction costs for consumers, force companies to invest in defence technologies, and ultimately derail the equilibrium of digital markets. The framework is illustrated through sample scenarios of cybercrime in the context of tourism booking fraud, social media marketing fraud, gaming scams, WhatsApp account compromise and cyber grooming, to show how these attacks have economic impacts beyond any financial losses. The results indicate that cybercrime represents hidden welfare costs in the form of disincentive effects on mutually beneficial digital transactions, on market participation and on the cost of doing business for legitimate enterprises. This means that the amount of damage associated with conventional estimates of financial loss, which include only the actual monetary losses, vastly underestimates the true social costs of cybercrime. This proposed framework adds to the growing field of the economics of cybersecurity by combining the welfare-economic and the digital forensic/ cybersecurity points of view, providing a holistic view to policymakers, business and researchers in determining the overall economic impact of cybercrime. This study ends with the identification of avenues for empirical testing and the creation of a Cybercrime Welfare Loss Index to aid evidence-based cybersecurity policies and digital market regulations.