Patents

Question 1

Problem with patents

Answer 1

give monopoly power to firms as no one else can produce the good they can set high prices and exploit the consumer.
Monopoly power is harmful to consumer welfare leading to a deadweight welfare loss.
However, the impact on economic growth is limited.
firms may argue consumers are not worse off as they are enjoying goods that wouldn’t have been developed without patent protection.

Question 2

Will There Be Innovation without Patents?

Answer 2

Patents may stifle competition or innovation by others
However without patents it takes time for other companies to catch up with developments in technology. By that time the first firm may already have generated brand loyalty

Question 3

Benefits of patents for businesses:

Answer 3

Helps to develop a competitive advantage
Provides a source of monopoly power
Barriers to entry maintain supernormal profits in the long run
Enables firms to develop into a new market

Question 4

Benefits to wider economy

Answer 4

Encourages Research and Development
Encourages exploitation of external economies of scale e.g. research projects with unis
Innovation is encouraged e.g. gains in dynamic efficiency that then reduce costs for consumers
Macro benefits, e.g. multiplier effects, gains in export competitiveness, a source of economic growth
Investment in research in turn in the long run may benefit society as a whole e.g. external benefits from health research, environmental patented technology

Question 5

Cons of patents

Answer 5

Patents allow supernormal profits to be made – a transfer of wealth to highly profitable monopolists
Patents may stifle competition or innovation by others
Alternatives to patents might help stimulate research e.g. subsidies to university research
Disadvantages of monopoly e.g. loss of allocative efficiency as prices charged are well above MC
May cause x-inefficiency due to the lack of contestability in the market
Costs of enforcing patents