education

Key Concepts and Summary

13.1 Investments in Innovation

Competition creates pressure to innovate. However, if one can easily copy new inventions, then the original

inventor loses the incentive to invest further in research and development. New technology often has positive

externalities; that is, there are often spillovers from the invention of new technology that benefit firms other

than the innovator. The social benefit of an invention, once the firm accounts for these spillovers, typically

exceeds the private benefit to the inventor. If inventors could receive a greater share of the broader social

benefits for their work, they would have a greater incentive to seek out new inventions.

13.2 How Governments Can Encourage Innovation

Public policy with regard to technology must often strike a balance. For example, patents provide an incentive

for inventors, but they should be limited to genuinely new inventions and not extend forever.
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