TB W6: Positive Externalities and Public Goods

What are ways to provide incentives for technology?

Market competition; firms can earn higher profits by finding a way to produce products more cheaply

How can competition discourage new technological innovation?

Firms can easily copy an idea that cost another company millions of USD in R&D

What are private benefits?

Profits or the benefits derived by an individual or firm directly involved in a transaction as either buyer or seller

What are social benefits of innovation?

They take into account the value of all the positive externalities of the new idea or product, whether enjoyed by other companies or society as a whole, as well as the private benefits received by the firm that developed the new technology

What are positive externalities?

Beneficial spillovers to a third party/parties

What are the difference in private benefits of investment in new equipment vs technology?

Investment in equipment means the private firm receives all the economic benefits that result from the investments

Investment in technology means the private firm only receives a small share of the overall social benefits

What is the difference in private and social demand for technology investments?

Generally the higher the rate of return, the higher the interest in investments

The social demand curve will always be higher because of high potential for positive externalities

Private companies will not want to bear as much cost if they can’t solely benefit from their investments

Is investment in human capital worth it?

Yes; large upfront investment (eg education) lead to greater future benefits

Is investing in education a bad or a good deal?

Estimated 10% RR - higher than treasury bonds or saving accounts

Benefits of education go primarily to the individual worker, so these returns are private rates of return to education

The social rate of return is also positive - ex: lower levels of crime, more stable government

What are other examples of positive externalities?

Vaccination

Investment in upgrading some homes in the neighborhood raises the value of homes in the entire area

What is the appropriate public policy response to a positive externality (e.g. tech)?

Help the investors/who is creating the positive externality to receive a greater share of the social benefits

What is the most popular way to increase new technology?

Guarantee the innovator an exclusive right to that new product or process

Why are intellectual property rights/patents important?

With a patent, a firm is able to earn monopoly profits on its product for a period of time

Without a patent, companies would have to face competition for any successful products, and could earn no more than a normal rate of profit

What are some problems with patents?

In a fast moving high tech industry, patents may be almost irrelevant because technology is advancing so quickly

Patents may sometimes cover too much or be granted too easily

Besides patents, what other ways are there to increase new technology?

1. **Government spending on R&D**: produces technology available for use by anybody but costs taxpayers money and can sometimes be directed more for political than scientific or economic reasons
2. **Tax breaks for R&D**: govt gives firms a reduction in taxes depending on how much R&D they do
3. *Cooperative research:* companies get together and collectively request funding

What is a public good?

When positive externalities are so extensive that private firms could not expect to receive any of the social benefit - ex: national security

What are the defining characteristics of a public good?

1.*Non-excludable:* it is costly or impossible to exclude someone from using the good
2. *Non-rivalrous:* when one person uses the public good, another can also use it

What are examples of public goods?

Government services - ex: national defense, public health funding

What are ways to provide public goods?

Government spending + taxes; markets produce public goods - ex: radio service

Public goods (at no charge) with fees for some purpose - ex: a free park but you pay for parking, to reserve certain areas

What are common resources? Exs?

Goods that are non-excludable and rivalrous

Exs: fishing - every fish you catch is one less than i can catch, we can both fish bc the waters are open to all fishermen