Key Terms
Key Terms
external benefits (or ) beneficial spillovers to a third party of parties, who did not purchase the good or that provided the externalities those who want others to pay for the and then plan to use the good themselves; if many people act as free riders, the may never be provided the body of law including patents, trademarks, copyrights, and law that protect the right of inventors to produce and sell their inventions when it is costly or impossible to exclude someone from using the good, and thus hard to charge for it even when one person uses the good, others can also use it beneficial spillovers to a third party or parties the benefits a person who consumes a good or receives, or a new product's benefits or process that a company invents that the company captures private rates of return when the estimated rates of return go primarily to an individual; for example, earning interest on a savings account public good good that is nonexcludable and non-rival, and thus is difficult for market producers to sell to individual consumers social benefits the sum of private benefits and external benefits social rate of return when the estimated rates of return go primarily to society; for example, providing free education
Key Concepts and Summary
13.1 Investments in Innovation
Competition creates pressure to innovate. However, if one can easily copy new inventions, then the original inventor loses the incentive to invest further in research and development. New often has ; that is, there are often spillovers from the of new that benefit firms other than the innovator. The social benefit of an , once the accounts for these spillovers, typically exceeds the private benefit to the inventor. If inventors could receive a greater share of the broader for their work, they would have a greater incentive to seek out new inventions.
13.2 How Governments Can Encourage Innovation
Public policy with regard to must often strike a balance. For example, patents provide an incentive for inventors, but they should be limited to genuinely new inventions and not extend forever. Government has a variety of policy tools for increasing the rate of return for new and encouraging its development, including: direct government funding of R&D, tax incentives for R&D, protection of , and forming cooperative relationships between universities and the private sector.
13.3 Public Goods
A has two key characteristics: it is and non-rival. means that it is costly or impossible for one user to exclude others from using the good. Non-rival means that when one person uses the good, it does not prevent others from using it. Markets often have a difficult time producing public goods because free riders will attempt to use the without paying for it. One can overcome the problem through measures to assure that users of the pay for it. Such measures include government actions, social pressures, and specific situations where markets have discovered a way to collect payments.
Self-Check Questions
1 . Do curves reflect ? Why or why not?
Text from Principles of Microeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
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