Self-Check Questions
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? 2 . Suppose that Sony's R&D investment in digital devices has increased profits by 20%. Is this a private or social benefit? 3 . The Gizmo Company is planning to develop new household gadgets. shows the company’s for for research and development of these gadgets, based on expected rates of return from sales. Now, say that every investment would have an additional 5% social benefit—that is, an investment that pays at least a 6% return to the Gizmo Company will pay at least an 11% return for society as a whole; an investment that pays at least 7% for the Gizmo Company will pay at least 12% for society as a whole, and so on. Answer the questions that follow based on this information. Estimated Rate of Return Private profits of the from an R&D project (in $ millions) 10% $100 9% $102 8% $108 7% $118 6% $133 5% $153 4% $183 3% $223 TABLE 13.4 a. If the going is 9%, how much will Gizmo invest in R&D if it receives only the of this investment? b. Assume that the is still 9%. How much will the invest if it also receives the of its investment? (Add an additional 5% return on all levels of investment.) 4 . The Junkbuyers Company travels from home to home, looking for opportunities to buy items that would otherwise end up with the garbage, but which the company can resell or recycle. Which will be larger, the private or the ? 5 . When residents in a neighborhood tidy it and keep it neat, there are a number of positive spillovers: higher property values, less crime, happier residents. What types of government policies can encourage neighborhoods to clean up? 6 . Education provides both to those who receive it and broader for the economy as a whole. Think about the types of policies a government can follow to address the issue of positive spillovers in and then suggest a parallel set of policies that governments could follow for addressing positive externalities in education. 7 . Which of the following goods or services are nonexcludable? a. police protection b. streaming music from satellite transmission programs c. roads d. primary education e. cell phone service 8 . Are the following goods non-rival in consumption? a. slice of pizza b. laptop computer c. public radio d. ice cream cone
Review Questions
9 . In what ways do company investments in research and development create ? 10 . Will the for borrowing and investing in R&D be higher or lower if there are no external benefits? 11 . Why might private markets tend to provide too few incentives for the development of new ? 12 . What can government do to encourage the development of new ? 13 . What are the two key characteristics of public goods? 14 . Name two public goods and explain why they are public goods. 15 . What is the problem? 16 . Explain why the federal government funds national defense.
Critical Thinking Questions
17 . Can a company be guaranteed all of the of a new ? Why or why not? 18 . Is it inevitable that government must become involved in supporting investments in new ? 19 . How do public television stations, like PBS, try to overcome the problem? 20 . Why is a football game on ESPN a quasi- but a game on the NBC, CBS, or ABC is a ? 21 . Provide two examples of goods/services that are classified as private goods/services even though they are provided by a federal government. 22 . Radio stations, tornado sirens, light houses, and street lights are all public goods in that all are and nonexclusionary. Therefore why does the government provide tornado sirens, street lights and light houses but not radio stations (other than PBS stations)?
Problems
23 . HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher . However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane's operating costs and ticket sales. Based on these estimates, shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines. Use the data to answer the following questions.
Text from Principles of Microeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
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