Question

Discussion: Patents & Copyrights

Article 8 of the US Consitution empowers Congress, in part, "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."

Some economists consider that patents & copyrights (what is called "intellectual property" or "intangible property") in their current form contribute to stifling innovation and to the unequal distribution of income by taking advantage of monopoly profits. Here is a short discussion of the benefits and costs of patents & copyrights. And here is a discussion of the effects of monopolies on income & wealth (Links to an external site.).

In several paragraphs, discuss whether in your view the patent & copyright system in the United States is perfect as it is, or if it should be modified, and in what way. Please justify your response with evidence from an academic-level outside source.

Answer 1

The economic principle underlying patents is to give inventors a temporary monopoly over their discoveries, in order to

encourage innovation.

I believe there is certainly need to rationalize patent laws in the United States. In some sectors of the economy such as

Medicine, patent laws have been cause of sky-high reaching prices of drugs. There is certainly need to redesign patent laws.

I think patent laws should be designed according to the principle of economics rather than falling prey to the strong lobbyists.

The net social benefit of an innovation is the difference between the welfare it brings to society, and its cost, particularly in the

R&D investment. Any innovation whose net social benefit is positive should be produced. By allowing innovators to reap the

benefits of their innovations, patents come close to that objective, but do not attain it. Indeed, patents are behind various

mechanisms that cause net social benefit to diverge from net private benefit, depending on the decision of the innovator.

Designing an optimal patent therefore consists in seeking the best compromise between these different effects.

The distortions caused by the innovator's monopoly affect the amount and the distribution of the surplus generated by the

innovation. The monopoly is in a position to set a higher price than if it were in competition. By doing so, it excludes some

consumers, who would buy the innovation if it were sold at competition price. This deadweight loss reduces the total surplus

created by the innovation at least during the lifetime of the patent. Furthermore, the profit collected by the innovator is lower

than the social value of the innovation. If the monopoly based its price solely on those consumers willing to pay the most for

the innovation, it would discourage all other consumers. The monopoly must therefore set a lower price and give consumers

some of the surplus. This consumer surplus is higher when consumers react sharply to a change in price, i.e., when demand

is highly elastic.

Thus the mechanism designed to remunerate the inventor of an innovation reduces the net social value of the innovation and

only allows the innovator to appropriate some of the remaining value. This limitation on the privatization of the benefit of the

innovation should be put in perspective, however. It is not necessary for the innovator to appropriate the total surplus created

by the innovation. To ensure that the innovation will be produced, it is sufficient for him to recoup his investment in R&D.