Economics » Positive Externalities and Public Goods » Why the Private Sector Under Invests in Innovation

Key Concepts and Summary

Key Concepts and Summary

Competition creates pressure to innovate. However, if new inventions can be easily copied, 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 these spillovers are taken into account, 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.

Glossary

positive externalities

beneficial spillovers to a third party or parties

private benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by the investing company

private rates of return

when the estimated rates of return go primarily to an individual; for example, earning interest on a savings account

social benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by other firms and by society as a whole

social rate of return

when the estimated rates of return go primarily to society; for example, providing free education

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