positive externalities

what is a positive externality from new technology?

A benefit that spills over to people or firms who did not create the technology and did not pay for it

what is a pb in technology creation?

the gain the inventor receives directly

why are social benefits larger than private benefits for tech

because society gains from imitation, learning, additional inventions, and cheaper production that the inventor does not fully capture

what problem does the gap between social benefit and private benefit create

firms under-invest in r and d because they cannot earn the full return on their invention

why might competition disourage innovation

because other firms can copy the idea faster and cheaper than the original inventor, reducing the inventor’s profit

policies that attempt to fix the market failure of positive externalities

they give inventors temporary exclusive rights, allowing them to earn more of the total benefit before competitors copu

what is the tradoff of patents

more innovation incentive but higher prices and restricted output during the patent period

calculate a private rate of return to innovation

social return = (social benefit - private cost) / private cost

when the social rate of return is higher than the private rate

society value the invention more than the inventor does → under investment in innovation will occur without government support.

how does uncertainty reduce innovation

if firms fear failure or low profits due to copying, they invest less in rd

innovation is a

public good because it is knowledge and cannot be perfectly controlled, it can be used by many at the same time

how does a subsidy mechanically change private invesment

it raises the firm’s return, the firm moves along a higher demand curve

what causes underproduction in positive externalities

the market only considers MPB not MSB

where is Qmarket determined

Where mpb intersects MPC

what does pSubsidy represent

the price consumer pay after received the subsidy

what is the size of the subsidy

the vertical distance between mpb and msb at qsocial

what is the purpose of the subsidy

to raise consumption from qmarket to qsocialwho

receives the subsidy

producers receive psocial, consumers psubsidy

if msb > mpb, market equilibrium is

too low

if positive spillovers exist, government should

subsidize consumption or production

education creates

positive externalities

What is the purpose of a patent?

To give exclusive rights for twenty years so the inventor can earn higher returns.

Why do patents increase innovation?

They raise the private rate of return closer to the social rate of return.

What two traits define a public good?

Nonexcludable and nonrival

how do you test if a good is nonexcludable

can people be prevented from using it without paying? nonexcludable, fireworks

how do you test if a good is non rival

does one person’s use reduce the amount available to others? if no rival, music

Why do private firms underprovide public goods?

They cannot charge users because they cannot exclude non-payers.

What is the free rider problem?

People benefit without paying, so everyone waits for others to pay.

How do you detect a free rider situation?

If the good is nonexcludable and people have no incentive to voluntarily contribute.

Why does the free rider problem prevent public good provision

Because rational individuals all choose not to pay, leading to zero private supply.

How is a public good different from a good with positive externalities? Example.

Education has spillovers but is excludable (schools can charge tuition) → not a public good.
National defense cannot exclude anyone → public good.

Example of a good with spillovers but not a public good.
Vaccines: huge positive externality but rival (one dose per person) and excludable.

What defines a common resource? Example.

Nonexcludable but rival.
Example: ocean fish — anyone can fish (nonexcludable), but your catch reduces mine (rival).

What is the tragedy of the commons? Example.

Overuse of a common resource because no one owns it.
Example: too many fishermen harvesting queen conch until the population collapses

How do regulators fix the commons problem? Example.

Set quotas or catch limits.
Example: allowing each fishing boat only 10 tons per season.

What is a quota in economics?

a rule that sets a maximum quantity that can be produced harvested, or imported

what does subsidy do

effectively reduces the firm’s marginal private cost and shifts the supply curve to the right on a negative externality graph