Question

Why do governments create temporary monopolies by granting patents? A monopoly imposes costs on consumers in the form of higher prices and less output supplied. So why would governments impose this?

Answer 1

Monopolies are companies who are the only seller of a good in demand in the market and thus they can control the market price and charge premium rates from the consumers to increase their profits substantially.

The government still create temporary monopolies by granting patents because of the research and development costs incurred by the companies to come up with an innovative products.Although the cost of producing one marginal unit of such commodities might be very less but the research and development costs of such goods are very high, and unless given a patent, the companies would not have a way to get back their investment on the research and development of the product and thus would have no incentive to do any research and development activities, which slows down technological advancement of the economy.For example, take the example of microsoft- had it not been granted patent to sell at a price much higher than its cost of production of additional unit, there would be no way microsoft could recover the research and development cost and thus it would not have been launched in the first place. Thus, as the government cannot do every research and development project on its own, they investment mainly on the research and development in core sectors while giving away patents to incentivize innovation and technological advancement.