Question

Should goverments play any role in encouraging (subsidizng) or discouraging (taxing) or regulating new technology and innovation? Justify your position using economic analysis.

Answer 1

Yes, the government should play an active role in promoting innovation. Research and development require major upfront investment with a low probability of success. But as innovation is so important, and given these costs and benefit analysis imply that the private sector might not be willing to do it solely without a solid base or support from the government, the government must subsidize the setting up of laboratories and also undertake some costly R&D itself, which can then be utilized by others. A subsidy will lower the costs for the private sector and bring marginal benefits closer to marginal costs.

Secondly, innovation requires incentives in the form of profits that would justify the investment. This can be done by a robust intellectual property rights regime(IPR) in the form of patent and copyright laws. These laws guarantee that the innovator will have the sole right to use it's innovation, for certain time periods, so that it can have a monopoly and hence earn higher profits, thereby encouraging innovation. But this has to be balanced properly with the requirement of fostering competition as greater competition is good for the consumers and also for the society as it reduces deadweight loss. Thus, in most countries, we see patents being enforceable for 20 years, after which other parties can also use the innovation for their own purposes.

Thirdly, not every new technology or innovation in every area beneficial. While medical research is very useful for society, research in manufacturing new opiods is not good and should be curtailed by the government. Eugenic and genetic research should be similarly regulated and monitored for their harmful effects.

Thus, we require strong government presence in the R&D sector