Innovation

Question 1

What is the Market Failure with Public Goods?

Answer 1

• Under-Provided within the Free-Market due to Non-Excludability
• This means that Public Goods have Positive Externalities (MSB>MPB)

Question 2

What does the MRU say about Patents?

Answer 2

• Provide financial incentives to innovate by artificially creating Monopoly Power
• But, it prevents the spread of new ideas- which could lead to further innovations

Question 3

What does the MRU say about Prizes?

Answer 3

• Prizes can fix the issue of excludability, but they have the issue of consumption not being private
• This leads to non-rivalrous aspects of consumption

Question 4

What does the MRU say about Subsidies?

Answer 4

• Subsidies can provide sufficient incentive to ensure that the firm produces innovation
• However, firms can be over-reliant on subsidies and can be costly

Question 5

What do Boldrin and Levine say about the Case Against Patents?

Answer 5

• Main argument stems from the creation of monopoly markets and the cost associated with enforcing the patent
• Suggests ‘Trade Secrets’ and ‘First-Mover Advantage’ as sufficient reason not to use patents

Question 6

What does the MRU suggest about the Ideas Equation? Provide the equation

Answer 6

• Ideas Equation: Ideas = Population X Incentives x Ideas/Hour
• As the world becomes more well off, more people can helpfully contribute towards innovations
• Globalised markets and better property rights create greater incentives to produce ideas (92%-56% for R&D leaders)
• The third component is the toughest to work out, unsure about productivity and could have DMR
• Internet increases spread of information - potential increasing returns to scale