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.
beneficial spillovers to a third party or parties
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
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
when the estimated rates of return go primarily to society; for example, providing free education