Question

Micro Economics

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.

I would love to know how this done/explained

Thank you in advance!

Answer 1

Market competition can provide an incentive for discovering new technology because a firm can earn higher profits by finding a way to produce products more cheaply or to create products with characteristics consumers want.

As Gregory Lee, CEO of Samsung said, "Relentless pursuit of innovation is the key principle of our business and enables consumers to discover a world of possibilities with technology." An innovative firm knows that it will usually have a temporary edge over its competitors and thus an ability to earn above-normal profits before competitors can catch up.

In certain cases, competition can discourage new technology, especially when other firms can quickly copy a new idea. Consider a pharmaceutical firm deciding to develop a new drug. On average, it can cost $800 million and take more than a decade to discover a new drug, perform the necessary safety tests, and bring the drug to market.

If the research and development effort fails-and every R&D project has some chance of failure-then the firm will suffer losses and could even be driven out of business. If the project succeeds, then the firm's competitors may figure out ways of adapting and copying the underlying idea, but without having to pay the costs themselves.

The first invention was an automatic vote counter, and despite the social benefits, he could not find a government that wanted to buy it. For instance, Gordon Gould came up with the idea behind the laser in 1957. A lengthy legal battle resulted, in which Gould spent $100,000 on lawyers before he eventually received a patent for the laser in 1977.

Compared to the enormous social benefits of the laser, Gould received a relatively little financial reward. A variety of studies by economists have found that the original inventor receives one-third to one-half of the total economic benefits from innovations, while other businesses and new product users receive the rest.

Will private firms in a market economy invest in research and technology? If a firm builds a factory or buys a piece of equipment, the firm receives all the economic benefits that result from the investments. When a firm invests in new technology, the private benefits, or profits, that the firm receives are only a portion of the overall social benefits.

The social benefits of innovation take into account the value of all the positive externalities of the new idea or product, whether enjoyed by other companies or society as a whole, as well as the private benefits received by the firm that developed the new technology.