However, when a firm invests in new technology, the private benefits, or profits, that the firm receives are only

a portion of the overall social benefits. The social benefits of an innovation account for 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 the firm that developed the new technology receives. As you learned in

Environmental Protection and Negative Externalities, positive externalities are beneficial spillovers to a third

party, or parties.

Consider the example of the Big Drug Company, which is planning its R&D budget for the next year. Economists

and scientists working for Big Drug have compiled a list of potential research and development projects and

estimated rates of return. (The rate of return is the estimated payoff from the project.) Figure 13.2 shows how
310 13 • Positive Externalities and Public Goods
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