Question

1. Patents allow firms to collect additional profit from their inventions; however, they raise the prices of products that are patented by eliminating competition. Should we, as a society, continue to have patents? Why or why not? Be sure to use externalities in your answer.

Answer 1

For economic development, patents are not required. Although the US and Europe have long-established patent systems, China's high-growth economy is not; its domestic patent system has evolved only recently, and its aim is not so much to safeguard inventors as to lend their work reputation.

Patents really harmed the economy, in truth. The burden of patent trolls in the United States, businesses that obtain strategic patents and use litigation pressure to gain steep profits from actual innovators, now amounts to 12% of company R&D expenditure. This is, in effect, a modern creativity levy.

Industry relies on the value of the patent system. Any industry that has long production lead times, which includes substantial R&D amounts, needs a robust patent system to a great degree. The pharmaceutical industry is a perfect example. It may take 10 to 12 years for a new drug to be created, and it costs a few hundred million to a billion pounds. Without a promise of return, if theoretically successful, there is no way a private investor will take such a gigantic R&D risk. Any rival might easily wait for the latest drug to come on the market without a patent scheme and then immediately reverse-engineer it and undercut the costs of the inventor because it did not bear the cumulative cost of production.

The scheme of patents has wider, more beneficial competitive effects: it favours manufacturing flexibility rather than specialisation. The beer industry , for instance, is centralised, with about half of the global market being dominated by the top three firms. Not much patenting is performed by them. In the pharmaceutical industry, on the other hand, about 25 firms collectively dominate half the global economy. They routinely trademark them. Pharma, as an industry, is more dynamic and meritocratic.