Why does optimal allocation call for unlimited distribution of information?
Suppose you have a product that you can distribute for constant marginal cost $c$. For every $v\geq0$ assume there are some consumers who value the good at $v$. The net welfare created when someone consumes the good is their value minus the cost of production.

Thus, if we want to maximise the total social surplus (net of costs), we should give the good to every consumer for whom $v-c\geq0$. Since a consumer will choose to buy the good if the price, $p$, is below their willingness to pay (i.e., if $v-p\geq0$), setting $p=c$ ensures the efficient outcome where exactly the consumers with value greater than marginal cost consume the good.

Now suppose we have an information good that can be distributed digitally for zero marginal cost ($c=0$). The above reasoning implies that the socially efficient price is $p=0$! Intuitively, giving you a copy of the good does not cost society anything (because information can be infinitely digitally duplicated), so even if you only get a tiny benefit from consuming it, that benefit will produce a (small but positive) net increase the total social surplus. But the only way to make sure that people who get very small (but positive) value from the good choose to consume it is to give them the good for free.



Arrow's broader point is that this produces a problem: if the price of an information good (e.g. a movie) is zero then firms have no profit incentive to produce movies at all, and then nobody gets any surplus. Eeek! The way society solves this problem is to say "if you make a movie, you get copyright, which means you have the monopoly right to sell that movie". The profits that come from being a monopolist over the movie are the rewards to the firm for having made it in the first place. But, of course, the monopolist movie studio will set $p\gg0$, so some consumers will not buy it even though they could be served as zero cost and this will increase welfare.



If you know your Econ 101 then this can be understood through the lens of some textbook models. Remember that in a basic textbook model of a market, the social surplus is the area below the demand curve but above the marginal cost curve. Social surplus is maximised when $p=MC$, which, for information goods, means $p=0$.

now think of a texbook monopoly model (where the monopoly comes because you own the copyright or patent): the monopolist will set $p&gt;MC$ and this produces a deadweight loss, which is the inefficiency Arrow refers to.