Question

4.   What does it mean (in microeconomic terms) that basic research is a public good? Define a public good and an externality and relate that to the existence of patents in basic research.

Answer must contain a brief introduction to concepts and facts, a part of analysis and critical evaluation and final conclusions

Answer 1

A public good has two important feature first one is non excludability in which we cannot exclude other to consume it. Second one is non rivalry in which consumption by one person will not reduce the availability of goods for other person consumption. In case of basic research, it is a public good as it create knowledge which can be shared across infinite number of people and there is no effective exclusion unless some legal framework applied like patent copyright trade secret. Further sharing cannot reduce the amount of knowledge for others. Therefore it has both property of of a public good as it has both property of a public good.

Public good create the problem of externalities means the there is external effect of the public good. As in this case research and knowledge creation ,it causes positive effect. It benefits whole society. In case of pollution there is negative externalities as it create problem to the local that not involve in the production. Therefore government need to take appropriate policy in order to internalize the negative externalities like carbon tax and regulation. Violin case of positive externalities it is a good thing that it benefit others. But there may be chance of free rider problem meaning that benefit and without bearing any cost for it.

it is generally recognised that in case of public good potential individual benefit does not match with potential social benefit. Hence there is gap between social and private benefit. In case of basic research it is simultaneously applied by infinite number of person and shared without any loss. As it has expansibility and non rivalry property. Another problem is that its possession cannot generate benifits without giving it for use. However it does not implies that it cannot be supplied and only government need to produce. The problem in the competitive market for such public good is that it cause inefficient production and allocation as marginal cost is zero with huge fixed cost.

The trade of basic research in the competitive market is difficult. As if the information about the new research pass on to the buyer before buying it will significantly devalue the price. Therefore some kind of exclusive possession of economic benefit from the basic research is required. It will provide incentive for the private player to invest in the Rand D and innovation. Hence patent as an instrument solve the externalities problem and underestimation of research value in the market. It provide the inventor some sort of exclusive right over it uses while putting it for the the public uses and replication with permission. It causes the supply of basic research to be increased and get appropriate benefit. Modern economic theory argued this kind of exclusivity and monopoly of knowledge is the short term sacrifice of consumer benefit for a long term gain in terms of revealing the knowledge and better progress. Therefore intellectual property right has served as instrument deal with inefficient allocation in the market as of public good.