Chapter 13 Positive Externalities and Public Goods Microeconomics

Free rider

Those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided

Intellectual property

The body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions

Nonexcludable

When it is costly or impossible to exclude someone from using the good, and thus hard to charge for it

Nonrivalrous

Even when one person uses the good, others can also use it

Positive externalities

Beneficial spillovers to a third party or parties

Private benefits

The dollar value of all benefits of a new product or process invented by a company that can be captured by the investing company

Private rates of return

When the estimated rates of return go primarily to an individual; for example, earning interest on a savings account

Public good

Good that is nonexcludable and nonrivalrous, and thus is difficult for market producers to sell to individual consumers

Social benefits

The dollar value of all benefits of a new product or process invented by a company that can be captured by other firms and by society as a whole

Social rate of return

When the estimated rates of return go primarily to society; for example, providing free education

"Tragedy of the Commons"

problem of overharvesting common resources, such as fish in the sea

Advances in technology, being vaccinated against a disease protecting other people from that disease, and the modernization of neighbors homes impacting property values in an entire neighborhood are all examples of _____.

positive externalities

_____ include patents, which give the inventor the exclusive legal right to make, use, or sellthe invention for a limited time, and copyright laws, which give the author an exclusive legal right over works ofliterature, music, film/video, and pictures. For example, if a pharmaceutical firm has a patent on a new drug, then noother firm can manufacture or sell that drug for twenty-one years, unless the firm with the patent grants permission.

Intellectual property rights

The problem in which people have an incentive to let others pay for a public good to which they enjoy some benefit is called a _____ problem.

free rider

privately created public goods

radio

Technology changes how people live and work and _____.

what they buy

Technological Breakthroughs of the Past 20 years

1) GPS becomes available to consumers, Toyota introduces the Prius hybrid car, and AT&T offers the ability to text on mobile phones

2) Wikipedia launches a user-generated, web-based encyclopedia

3) Friendster kicks off the social networking business, followed by Facebook, Twitter, and others; The Human Genome Project is completed; Search engines gain mainstream prominence

4) Nintendo launches Wii

5) Apple introduces the iPhone

6) Cell phones recognize human voices via artificial intelligence

_____ can provide an incentive for discovering new technology because a firm can earn higher profits by finding a way to produce products more cheaply or to create products with characteristics consumers want.

Market competition

Major Inventions That Were Less Profitable Than You Might Expect

1) Eli Whitney invented the cotton gin, but then southern cotton planters built their own seedseparating devices with a few minor changes in Whitney's design. When Whitney sued, he found that the courts in southern states would not uphold his patent rights

2) Thomas Edison still holds the record for most patents granted to an individual. His first inventionwas an automatic vote counter, and despite the social benefits, he could not find a government that wanted tobuy it.

3) Turing delivered a paper titled, "On Computable Numbers, with an Application to the Entscheidungsproblem," in which he presented the notion of a universal machine (later called the "Universal Turing Machine," and then the "Turing machine") capable of computing anything that is computable. The central concept of the modern

4) Gordon Gould came up with the idea behind the laser. He put off applying for a patent and, by the time he did apply, other scientists had laser inventions of their own. A lengthy legal battle resulted, in which Gould spent $100,000 on lawyers, before he eventually received a patent for the laser twenty years later. Compared to the enormous

positive externalities

private benefits

social benefits

The investment in anything, whether it is the construction of a new power plant or research in a new cancer treatment, usually requires a certain _____ with an uncertain future benefit. The investment in education, or human capital, is no different.

upfront cost

Gregory Lee, CEO Samsung

"Relentless pursuit of new innovation is the key principle of our business and enables consumers to discover a world of possibilities with technology."

According to Walter McMahon, the _____ to education typically include better health outcomes for the population, lower levels of crime, a cleaner environment and a more stable, democratic government. For these reasons, many nations have chosen to use taxpayer dollars to subsidize primary, secondary, and higher education.

positive externalities

The appropriate public policy response to a positive externality, like a new technology, is to help the party creating the positive externality receive a greater share of the social benefits. In the case of vaccines, like flu shots, an effective policy might be to provide a _____ to those who choose to get vaccinated.

subsidy

If the private sector does not have sufficient incentive to carry out _____, one possibility is for the government to fund such work directly.

research and development

In the 1960s the federal government paid for about two-thirds of the nation's R&D. Over time, the U.S. economy has come to rely much more heavily on _____ R&D.

industry-funded

A complementary approach to supporting R&D that does not involve the government's close scrutiny of specific projects is to give firms a _____ depending on how much research and development they do.

reduction in taxes

To be categorized as a public good, a good must be both _____ and nonrivalrous.

nonexcludable

Markets often have a difficult time producing public goods because some people will attempt to use the public good without paying for it. The _____ problem can be overcome through measures to assure that users of the public good pay for it. Such measures include government actions, social pressures, and specific situations where markets have discovered a way to collect payments.

free rider

The problem of overharvesting common resources is not a new one, but ecologist Garret Hardin put the tag "Tragedy of the Commons" to the problem in a 1968 article in the magazine Science. Economists view this as a problem of _____. Since nobody owns the ocean, or the conch that crawl on the sand beneath it, no one individual has an incentive to protect that resource and responsibly harvest it.

property rights

In 1998, Congress passed the _____. For copyrights owned by companies or other entities, it increased or extended the copyright from 75 years to 95 years after publication.

Sonny Bono Copyright Term Extension Act

For copyrights owned by individuals, the Sonny Bono Copyright Extension Act increased or extended the copyright coverage from 50 years to _____ after death.

70 years

In countries that already have patents, economic studies show that inventors receive _____ of the total economic value of their inventions.

one-third to one-half

In a fast-moving high-technology industry like biotechnology or semiconductor design, patents may be almost irrelevant because _____.

technology is advancing so quickly

If the private sector does not have sufficient incentive to carry out research and development, one possibility is for _____ to fund such work directly.

the government