to the rest of us, the firm’s private demand curve would be the same as society’s demand curve. According to

Figure 13.2 and Table 13.1, if the going rate of interest on borrowing is 8%, and the company can receive the

private benefits of innovation only, then the company would finance $30 million. Society, at the same rate of

8%, would find it optimal to have $52 million of borrowing. Unless there is a way for the company to fully enjoy

the total benefits, then it will borrow less than the socially optimal level of $52 million.

FIGURE 13.2 Positive Externalities and Technology Big Drug faces a cost of borrowing of 8%. If the firm receives
only the private benefits of investing in R&D, then we show its demand curve for financial capital by DPrivate, and the
equilibrium will occur at $30 million. Because there are spillover benefits, society would find it optimal to have $52
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