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

Review and Practice
SUMMARY
1. Ideas are different from the goods envisioned in the
basic competitive model—they are nonrivalrous.
2. Industries in which technological change is important
are almost necessarily imperfectly competitive. Patents
are one way the government makes it difficult and costly
for firms to copy the technological innovations of others.
A firm with a patent will have a government-enforced
monopoly. The expenditures on R & D are fixed costs;
when they are large, there are likely to be few firms in
the industry, and price competition is more likely to
be limited.
3. Long-lasting and broad patents reduce competition (at
least in the short run), but provide greater incentives
to innovate. Excessively broad patent coverage may
discourage follow-on innovation.
4. Learning by doing, which provides companies (or countries)
that begin making a product first an advantage
over all later entrants in lowering costs of production,
may be a source of technological advantage.
5. Research and development generally provides positive
externalities to consumers and other firms. But since
the innovating firm cannot capture all the social benefits
from its invention, it will tend to invest less than a
socially optimal amount.
6. Basic research has both of the main properties of a
public good: it is difficult to exclude others from the
benefits of the research, and the marginal cost of an
additional person making use of the new idea is zero.
7. A number of governmental policies encourage technological
advance: patents, direct spending on research,
tax incentives to encourage corporate R & D, temporary
protection from technologically advanced foreign competitors,
and the relaxation of antitrust laws to allow
potential competitors to work together on research
projects.
KEY TERMS
rivalrous goods
nonrivalrous goods
patents
intellectual property
royalty
static efficiency
dynamic efficiency
trade secret
learning by doing
learning curve
basic research
industrial policies
infant industry argument
REVIEW QUESTIONS
1. In what ways do industries in which technological
change is important not satisfy the assumptions of the
basic competitive model?
2. Why do governments grant patents, thereby conferring
temporary monopoly rights? Explain the trade-off society
faces in choosing whether to offer patents for long or short
terms, and whether to offer broad or narrow patents.
3. How do the effects of learning by doing provide an
advantage to incumbent firms over prospective
entrants?
4. Why might it be harder to raise capital for R & D than
for other projects? How can established firms deal with
this problem? What about start-up firms?
5. How do positive externalities arise from R & D?
Why do externalities imply that there may be too
little expenditure on research by private firms?
6. Explain how basic research can be thought of as a public
good. Why is society likely to underinvest in basic
research?
7. What are the arguments for and against industrial
policies?
8. What possible trade-off does society face when it considers
loosening its antitrust laws to encourage joint
R & D ventures?
PROBLEMS
1. Imagine that Congress is considering a bill to reduce the
current twenty-year life of most patents to eight years.
REVIEW AND PRACTICE ∂ 469