[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

allocate their valuable time and resources to research, they must reap a return. They
can profit from their work in one of two ways—either by using it themselves to make
or sell a product or by licensing the right to use it to others. In either case, however,
the inventor has to prevent others from freely using the idea. Otherwise, the inventing
firm would have a hard time getting a return, because competition would drive
the price down to the marginal cost of producing the product. And the expense of
discovery is itself a fixed cost; once it is made and developed, it typically lowers the
marginal cost of production. In short, for the inventor to obtain a return, she must be
able to exclude users who do not pay for her invention. But some ideas are not very
excludable. After Henry Ford had devised the modern assembly line, he might have
kept it secret for a while by barring visitors to his factory, but certainly anyone who
saw one could set up the same process in another factory. Most software companies
keep their source code secret in order to exclude users who have not paid a licensing
fee. To increase the incentive to invent, inventors must be given property rights to their
work. If property rights are insecure—if a firm planning on undertaking research is
Thinking Like an Economist
INTELLECTUAL PROPERTY RIGHTS AND DISTRIBUTION
As the importance of innovation in the economy has grown,
so too has the importance of intellectual property rights.
Hence, it was no surprise that the United States pushed for
stronger intellectual property protection in the so-called
Uruguay Round of the World Trade Organization’s trade negotiations,
completed in 1994. Many developing countries
objected to this initiative.
The key to understanding this dispute lies in the nature of
intellectual property rights. How these rights are defined—for
instance, the length of the patent—has significant distributional
effects. Most inventions are produced in the developed
world; stronger intellectual property rights increase the
incomes of the patent holders but force consumers in the
developing world to pay higher prices. In the past, businesses
outside the more advanced countries often freely pirated
books, copied CDs, and produced goods such as drugs that
were covered by patents. Not surprisingly, many in these
developing countries objected to stronger intellectual property
rights protections. Two issues in particular grabbed
popular attention.
The first concerned the patenting of drugs derived from
plants and animals in the developing world. While the drug
companies insisted that they should be rewarded for creating
useful medicines, those in the developing countries
maintained that the medicinal properties of the matter used
were already well known and that the companies merely verified
them. Moreover, they argued that local people deserved
greater returns for preserving the biodiversity on which such
drugs depend.
The second issue also concerned drugs. Previously, companies
in countries like South Africa had manufactured
knockoff drugs, selling them for a fraction of the prices
charged by the drug companies from the advanced industrial
countries. Under the Uruguay Round agreement, people
in developing countries would have to pay whatever the drug
companies in the developed countries decided. In the case
of life-preserving AIDS drugs, this policy would condemn
thousands to a premature death, as few could afford the
prices the drug companies insisted on charging. At first, the
U.S. government backed the American firms, threatening
trade retaliation if South Africa refused to comply. But in
the end, the international outrage was so great that the
American government and the drug companies caved in and
agreed to provide the drugs at cost.
456 ∂ CHAPTER 20 TECHNOLOGICAL CHANGE