Question

1. [20 marks]  Does a market economy provide too little or too much incentive to undertake innovation?  Explain, identifying the criterion you are using to answer.  Identify the roles that competition and appropriability play in your answer.
2. [20 marks]  Does empirical evidence show that patents increase innovation rates or not?  Explain, citing evidence and measurement issues as appropriate.  
3. [10 marks]  Compare the static and dynamic welfare effects of using patents to incentivise innovation or, alternatively, using prizes to incentivise innovation. Point out both advantages and disadvantages of each method.  

Answer 1

a) "market economy provide too little or too much incentive to undertake the innovation" is depends upon the project and the area where we do invest our research. if we will take the example of biotech and medicines it is too much incentive to undertake the patent as the patent on new innovation to a company can only bring the investment or funding from outside. But when it comes to other types of patent it always depends on the implacability of that patent. how that innovation used for the implementation purpose. so the implementation may take more time to get popularized and get funding. Here when we are discussing the patent and innovation it can popularly measure by its implication and raising fund for the product. if it is popular and well-accepted then the fundraising is not a problem whereas implication of that innovation matters a lot by its extensive use. so the competition it self defines the popularity of innovation, where the appropriability is closely related to the success of innovation.

b) the popular evidence of innovation and patent can be found in the biotech or medicine industry where the innovation is associated with the effectiveness of the medicine and there is a quick and large no. of patents been filed regarding it. so there is a positive correlation between patent and innovation rate.

c) static effect is taking out the resources from inefficient investment to an efficient one. where dynamic present overall growth in the market and the impact on a company of expanding production and achieving economies of scale. so her patent will give popularity to innovation and that leads to an incentive for innovation. so more innovation can be expected from the researcher and that will enhance the company's productivity. so it may have a disadvantage of low-quality innovation or the chances of imitation.

Alternatively, when we are giving a prize to innovation it will make the thing more valuable which make the process of innovation more rapid and it may lead to get more patent as innovation. But the disadvantage associated with it is the innovation may be popular but it may not have the quality to register patent.