Overview
This lecture covers positive externalities, reasons for underinvestment in innovation by the private sector, government policies to promote innovation, and the basics of public goods.
Positive Externalities & Innovation
- Positive externalities are beneficial spillovers to third parties from an economic transaction.
- The private sector often underinvests in innovation because creators only capture part of the total social benefits.
- Patents temporarily allow innovators to profit exclusively, encouraging investment in research and development (R&D).
- Innovators typically capture only 1/3 to 1/2 of their inventions' total economic benefits; the rest goes to others.
- Social benefits equal private benefits plus external benefits received by society.
Government Role in Promoting Innovation
- The government funds basic research to compensate for private sector underinvestment.
- Policies include intellectual property rights (patents, copyrights), R&D subsidies, and research grants.
- Cooperative research between universities and companies fosters innovation systems like Silicon Valley.
- Tax credits for R&D (e.g., the Research and Experimentation Tax Credit) incentivize private investment.
Education & Human Capital
- Investment in education yields both private and social returns, including higher productivity and societal benefits.
- The private return of a college education in the US is estimated at 10–15% and can be higher for exclusive institutions.
- Public education is a positive externality, benefiting broader society beyond individual students.
Public Goods
- Public goods are non-excludable (hard to prevent anyone from using) and non-rivalrous (one user's consumption doesn’t reduce availability to others).
- Examples include national defense, public sanitation, and basic research.
- Free rider problem: Individuals can benefit without contributing, risking under-provision of public goods.
Government Solutions for Public Goods
- Governments fund public goods via taxes, ensuring everyone contributes and the good is provided.
- Social pressures and personal appeals can supplement tax funding to reduce free riding.
Positive Externalities in Public Health
- Public health programs (e.g., sanitation, immunizations, public campaigns) yield positive spillovers like longer life expectancy.
- Regulations and innovations (seat belts, safety glass) have enhanced public safety and reduced mortality.
Key Terms & Definitions
- Positive Externality — Benefit gained by third parties from a transaction or innovation.
- Public Good — A good that is non-excludable and non-rivalrous.
- Free Rider — A person who benefits from a good without paying for it.
- Patent — Government-granted exclusive right to produce and sell an invention for a set period.
- Marginal Social Benefit — Total benefit to society from consuming an additional unit, including externalities.
Action Items / Next Steps
- Review the separate presentation on public goods.
- Prepare for questions about government policies supporting R&D and the characteristics of public goods.
- Read textbook Chapter 13 for further examples and details.