Pricing Security: Vulnerabilities as Externalities

Abstract

We argue that provision of computer security in a networked environment is an externality and subject to market failures. However, regulatory regimes or a pricing schemes can causes parties to internalize the externalities and provide more security. The current mechanisms for dealing with security are security analysis firms; publications of vulnerabilities; the provision of emergency assistance through incident response teams; and the option of seeking civil redress through the courts. The overall effectiveness of these mechanisms is questionable. The foundation of environmental economics supports building a market as a solution to the problem of widespread vulnerabilities. In this work we propose a market for vulnerability credits.

This paper is a first step to developing a pricing scheme for vulnerabilities to increase infrastructure security. We begin by arguing that security is an externality and one which could be priced. We examine security taxonomies in terms of their usefulness for pricing security vulnerabilities. We discuss the parallel with pricing pollution. We address the issue of jump-starting the market. Regulatory mechanisms for collection are not extensively addressed, although pricing without payment is meaningless, the problem must be parsed to be solvable.

Keywords: trust, security, privacy, e-commerce

JEL Classification: A1, A12, A19, D19, D62, H23, K1, L96, L63