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

its marginal cost is therefore zero. So from society’s perspective, the idea should be
freely available to everyone. After all, it costs nothing to let others use it.
There is a tension, then, between providing incentives for the production of
new ideas and ensuring that they can be widely used. Inventors need secure property
rights that enable them to benefit from their ideas; they need to be able to
exclude users who do not pay. Yet once an idea is invented, its zero marginal cost of
production suggests that it should be freely available.
The digitization of music has brought the issue of intellectual property rights
into sharp focus. Many music lovers think nothing of downloading and sharing music
files at no cost, and companies such as Napster developed software to make this
sharing possible. But the music actually “belongs” to the copyright holder, who has
a right to demand payment for its use. Representatives of the music industry have
repeatedly brought companies and individuals to court over the downloading and
sharing of music files. Record labels cite declining sales of CDs as evidence
that music piracy will reduce their financial incentives to find and market new artists.
Now, major companies such as Apple and Sony run online music stores that allow
individuals to download songs for a fee.
Society addresses the tension between making intellectual property widely
available and protecting the property rights of inventors through copyright and
patent laws. Once issued, a patent gives an inventor the exclusive rights to his invention.
Because others can use it only with his permission, the inventor can impose a
licensing fee to capture some of the benefits of his idea. But in the United States,
patents are valid only for a fixed period (usually twenty years), and after they expire
their ideas are freely available. Copyrights on written work generally now last for
the life of the author plus seventy years. In this way, society both increases the
incentive to produce new ideas and ensures that they eventually become available
to everyone.
Expenditures on R & D Innovations and technological process do not simply
happen. They require deliberate investment in research and development.
Pharmaceutical manufacturers devote millions of dollars and thousands of scientists
to the search for new drugs; companies such as Intel and AMD fund projects
to develop the next generation of computer chips; and the thousands of firms that
produce consumer goods ranging from household cleaners to garden hoses are constantly
seeking improvements in their products as a way to increase their profits.
Industry accounts for about 65 percent of U.S. R & D expenditures, with the
remainder provided by the government, universities, and nonprofit organizations.
In 2002, just under 30 percent of R & D spending was by the government. Historically,
roughly half of the federal spending on R & D has been for defense, which now
accounts for about 15 percent of total U.S. R & D expenditures. This percentage has
fallen steadily; it was more than 30 percent in 1970.
Some analysts put the private returns on R & D expenditures at more than 25
percent; and since many of the returns accrue to firms other than those undertaking
the research, social returns are estimated to be even higher. Such rewards may
make the relatively low level of investment in research somewhat surprising. High
risk and limitations on the ability to borrow to finance R & D provide part of the
explanation for this seeming underinvestment.
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