Knowledge as a public good

Question 1

Basic characteristics of knowledge

Answer 1

• It can be codified (explicit) or tacit (implicit)
• It can be embodied in scientific publications as well as new products (sciencetechnology relationship)
• It can be internal (R&D effort) or external (industrial companies)
• Knowledge transfer is associated with the exchange of knowledge within networks of innovators and imitators
• Knowledge diffusion describes the diffusion within the group of innovators and imitators
• Technological knowledge is transferred mainly via two channels:
• Human capital
• New technologies (or intermediate and capital goods)

Question 2

What are the sources of market failures (in general and in relation to knowledge)? (Arrow, 1959)

Answer 2

1. Indivisibilities
   ≡ Cause non-convexities in production functions, drive marginal costs (MC) below average costs
   ≡ Create strong incentives for firms to monopolize markets (leads to a natural monopoly in the production of innovations)

It is useful to distinguish between

• economic: impossible to exchange and pay for a good in proportion to the exact quantity used. and technical indivisibility.
• Technical indivisibility:impossibility of dividing a good into amounts to be used for production or consumption.

2. Uncertainty
   ≡ Creates problems for market allocation processes
   ≡ Often leads to too low levels of production and/or investment
   ≡ Separating risk-bearing from production and/or investment is difficult because of moral hazard

=> this mainly concerns the outcome of R&D with respect to the inputs (technological uncertainty)

3. Externalities
   ≡ Unpriced actions of one agent affect profits of another
   ≡ Externalities are a central problem for the provision of public goods
   ≡ Providers of public goods are likely to create many externalities, thus markets may not provide the right incentives to encourage their production

• > difficult for companies to appropriate the returns of their investment in R&D;
• > invention is introduced in the market, it follows a period in which the inventor is the only producer of that knowledge and it therefore charges monopolistic prices.
• > other producers can enter the same market eroding the monopolistic profits of the market leader.

Question 3

What are the characteristics of public goods?

Answer 3

1. A public good is
   a. Non rival = the consumption of this good does not reduce its availability to other individuals.

b. Non excludable = no one can be excluded from consuming it

Question 4

How can we define knowledge? Is knowledge a public good? Why?
According to Faulkner (1994),

Answer 4

Definition

• knowledge is the ensemble of “knowledge, expertise, skills and information”.
• it is considered to be a public good (non-rival) and nonexcludable
• it is often thought as an “impure” public good because of some level of excludability (e.g. secrecy).

Question 5

What are the differences between tacit and codified knowledge?

Answer 5

Definition Tacit
“the deeply personalized knowledge possessed by individuals that is virtually impossible to make explicit and to communicate to others through formal
mechanisms” (Dicken, 2007:99).

Definition Codified
- knowledge is “the kinds of knowledge that can be expressed formally in documents, blueprints, software, hardware, etc.” (Dicken, 2007:99).

Question 6

What do we mean by „resource allocation for invention“?

Answer 6

• analysis of where scarce factors relevant for the production of knowledge (e.g. capital, existing information) are distributed among producers to generate innovation as output.

Question 7

What is the marginal cost (MC) of ‘producing’ knowledge (i.e. of supplying it to consumers)?

Can knowledge be sold/bought at MC?

In other words, can perfect allocation be achieved in the market of information?

hy?

Answer 7

• knowledge is a public good -> the marginal cost of supplying a unit of this good to an additional individual is zero
• > still transmission costs

Knowledge cannot be sold at a price of zero because this would not incentivize its production (market failures)

• there is the need to create a monopoly that allows firms producing knowledge (e.g. through R&D) to adequately appropriate the returns of their investment
• on the supply side firms experience market failures.
• on the demand side, if the price of knowledge was set to be above 0 (the level of MC), then the demand would be less than optimal
• the final amount of R&D is also less than optimal, a circumstance that make it necessary governmental intervention in order to reduce the deadweight welfare loss.
• in monopolistic markets the existence of pre-invention monopolistic profits makes the incentive to invent higher in competitive markets where firms need to innovate in order to ensure their profitability

Question 8

What is a “global public good”?

Answer 8

• A global public good is a public good that is not limited geographically

• Examples:
 international economic stability,
 international security (political stability),
 international environment (e.g. climate),
 international humanitarian,
 and knowledge (e.g. the solution to a mathematical problem)

The fact that knowledge is a global public good raises the issue of the responsibility of the international community when it comes to efficiency and appropriability.

Question 9

What role do governments and states play in the provision of such global public good?

Answer 9

According to Stiglitz, governmental interventions are needed to reap all the benefits
from producing public goods thus achieving the efficient level of production
(allocation optimum).#

Two strategies can be followed:
• Increase the degree of appropriability, for instance by issuing patents and copyright protection. The dynamic efficiency gains which result from the internalization of all profits from invention (through licenses or by charging a monopolistic price) lead to the production of more knowledge; this efficiency is expected to counterbalance the static inefficiency (deriving from underutilized knowledge or underproduction of the good protected by the patent). In determining the balance between the two, the length of the protection is of paramount importance (limit the duration of the patent)

• Direct government support (again in terms of financial support or tax benefits) If government could costlessly raise revenues for financing the support and if government were effective in discriminating between good and bad research projects, clearly this strategy would dominate that of enhancing intellectual property rights, for the latter strategy entails static distortions (the monopoly prices associated with patent rights result in prices exceeding marginal costs) and the inefficient utilization of knowledge. The static distortions can be thought of as a tax used to finance the research and development; the tax, however, is not an optimal tax

Question 10

What are advantages and disadvantages of patents? (Include in your answer some
comparison with trade secrets. Give examples.)

Answer 10

Positive effects of patents are:
• They increase the appropriability of returns on R&D
• They represent a self-selection mechanism which solves the problem of moral
hazard (since only successful innovations are patented)

Drawbacks of patents are:
• Trade-off between dynamic efficiency (= benefits from greater innovative activity)
VS static inefficiency (=losses from underutilization of knowledge/underproduction
of patented good)
• Abuse of monopoly (e.g. pharmaceutical companies) especially in developing
countries where there are no anti-trust authorities

• Appropriability problems with basic knowledge:
 Many advances in basic knowledge cannot be charged (e.g. mathematical
theorems);
 Should the use of common knowledge be charged (e.g., production of drugs
from local plants)?
If not, why is the adoption of new technology in developing countries seen as a
mere “adaptation” of an already patented technology?
There seems to be a big contrast between the way local unpatented knowledge
is treated and the way we deal with adaptation in developing countries of
innovations patented in developed countries.
Therefore, how much of the returns to an innovation should be credited to the
use of previously accumulated knowledge?
Issues of fairness of the international property regime in an attempt to
balance global with local knowledge.

• As an alternative to patents, direct government support could be given or states
should accept to stay with an underutilized level of knowledge and/or underproduced level of goods.
• In particular, basic research and many other fundamental forms of knowledge
should not be protected at international level (for the arguments seen above).
• Knowledge requires public support at the global level and collective action
instead.