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"The innocent man must be punished!" - Mark Corrigan

"If you start treating everybody like criminals, then pretty soon everybody starts acting like a criminal," says PRS economist Will Page, referring to the Spanish digital music experience.

Spain is the best warning yet of what happens when you slap a clumsy music tax on people. They don't like it. Music copyright infringement in Spain is now rampant, digital revenues are tiny, and resentment against the music industry runs deep.

Yet today we find the PRS arguing for a music tax, and more ominously, it relies on technology from former spook offshoot Detica, which will opt every broadband subscriber into a Phorm-style Deep Packet Inspection regime. So what gives?

A new paper by Page and David Touve (PDF, 630kb) makes the case for pursuing compensation by licensing, rather than litigation. They want to decriminalise P2P file sharing.

"Legal services like Spotify might stand a greater chance of swimming, as opposed to sinking, if they did not face the challenge of competing with illegal, free services," they note. At the same time, the music and movies flowing across the networks "provide value for those who transmit these works to the public".

The problem is that the creators and their investors don't get paid. So far, so good.

The solution is trickier, however. There are several approaches to decriminalising file sharing, and Page and Touve make the case for one in particular, what they call "nudging" the market by imposing levies on ISPs.

"At some date a price would be placed on the indexed measure of unlicensed media on ISP networks," they argue. This would lift the threat of prosecution from ISPs and end-users alike. In short, "the effect of a levy is to license the rights in works and therefore legalise the otherwise illegal activity".

The justification is an application of Coase's idea of market externalities. The classic negative externality is pollution. Tolerating the unlicensed file sharing, argue Page and Touve, gives us a spillover that ultimately harms the ISP.

Oddly, the paper dismisses one of the best ideas it raises - the idea that ISPs should be licensed for file sharing, just as pirate radio stations such as Xfm were brought in from the cold - given spectrum and broadcasting rights in exchange for cash. This is given the bum's rush.

"Could rightsholder [sic] license the ISP for file sharing? Not without revisiting the safe harbours" - is how the paper dismisses the idea. This is odd for a few reasons. Firstly 'safe harbor' from copyright infringement is a US legal precept that is not directly transferrable outside the USA - so it's strange to hear it from a UK performing rights society. Secondly, experts dispute that this is the case.

"You don't need to look at safe harbours, or anywhere else for that matter," Paul Sanders of Playlouder MSP told us. "Everything to do with where the ISP is involved is perfectly capable of being covered under a contract.

"ISPs aren't liable for things they don't know about. You need to make sure your systems only touch what you know about. There are ways to license file-sharing on networks in a fair and open manner."

Secondly, ISPs have already been licensed for file sharing (eg, Soribada in Korea), and many more will be in the future as experiments take place.

Thirdly, the justification for not exploring the idea is that significant legal changes will be required. Yet elsewhere the authors propose alternatives that um… require significant legal changes. The prospect of these, by the way, was dismissed by the Government.

“I understand this would require fresh legislation, which we don’t have any plans for at this time," a BIS spokesperson told the FT.

But the biggest argument against a music tax on ISPs is one of incentives, and here Spain provides a great example of consumer behaviour.

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