5) Markets and Innovation

Question 1

What is free entry?

Answer 1

𝜋i (profit) = R (opportunity cost of capital)

Question 2

What is meant by opportunity cost of capital?

Answer 2

the potential return you could have earned if you had invested your money elsewhere instead of using it for a particular project or investment. It represents the “cost” of missing out on the next best alternative.

Question 3

non rival meaning?

Answer 3

Me having more of a good does not mean you have less of a good

-e.g. knowledge

Question 4

non-excludable meaning?

Answer 4

can’t stop agents consuming the good

Question 5

How do you fix non excludability to promote innovation?

Answer 5

1)Government support

2)Patents/ creating excludability

Question 6

Issues with government support?

Answer 6

-how do you determine social value and if government can determine F (fixed cost)

-government is time inconsistent (hold up problem)

Question 7

Issues with patents/ creating excludability?

Answer 7

-lead to under innovation

-lead to an issue of static vs dynamic efficiency, as firm is charging a monopoly price when having a patent

Question 8

What is creative destruction?

Answer 8

firms only care about profit, firms only care about stealing profit. Firms are not incentivized to innovate to create social surplus and make profit but innovate a tiny bit to steal surplus from other firms

Question 9

What does the social value of innovation depend on?

Answer 9

-b : value of innovation to people

-F fixed costs of innovation

R-marginal cost of production

Question 10

Deadweight loss meaning?

Answer 10

-loss from people who value good more than it cost to make but less than price set

-loss compared to if it was a competitive market compared to a monopoly

Question 11

What is benefit to society?

Answer 11

-triangle above marginal cost

Question 12

What is static efficiency?

Answer 12

-price>MC , which leads to DWL

Question 13

What is dynamic efficiency?

Answer 13

-continued innovation

Question 14

How can we promote dynamic efficiency?

Answer 14

-we accept DWL (static efficiency) today for innovation tomorrow

-we can control this using (T) length of patent

Question 15

Alternative to monopoly?

Answer 15

Government Buys Patent and Releases It to the Public Domain

means price = R

or government subsidies monopolist

Question 16

Issue with government buying patent?

Answer 16

-valuation problem

Question 17

Issue with government subsidise?

Answer 17

-costly