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A discussion of government's role in patent policy

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"Government involvement in general scientific research has been justified on the grounds that advances in knowledge are public goods - once produced, information can be shared at virtually no cost. A new production technology in an industry could be making available to all firms, reducing costs of production, driving down price and benefiting the public. The patent system, however, allows private producers of "new knowledge" to exclude others from enjoying the benefits of that knowledge. Inventors would have little incentive to produce new knowledge if there were no possibility of profiting from their inventions. If one company holds exclusive rights to an advanced production process, it produces at lower cost but can use the exclusion to acquire monopoly power and hold price up."

a. On balance, is the patent system a good or a bad thing? Explain in detail.

b. Is government involvement in scientific research a good idea? Discuss.

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Solution Preview

a. On balance, is the patent system a good or a bad thing? Explain in detail.

In general the patent system guarantees an innovator the right to recover costs associated with the innovation process. Patents are limited (roughly 12 years) so that once the patent has expired the technology can spill over into the industry at large. So patents essentially give firms limited monopoly rights. When the patent expires then perfect competition is restored and all firms have access to the technology as either a way to lower production costs or for product improvements depending on the type of innovation (product or process). If there were no patent laws or if they were not enforced then there would be no incentive to innovate. Firms would instead save their billions in R&D expenditure and wait for another firm to discover a technology (free ride) then simply copy the technology at a much lower cost and implement it. I suppose that in a sense the patent system is a way of dealing with a public goods ...

Solution Summary

In this exercise, I provide a discussion of the roles that governments play in patent policy and R&D. I examine the role of R&D in the economy and how markets do or don't create incentives for such endeavors. I also discuss the difference between pure and applied science and the different incentives faced by governments and firms in pursuing these different types of scientific projects.

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