D. In many parts of the economy, scientific knowledge is what might be thought of as a general purpose tool. There is old wisdom, still relevant, about the funding of scientific discoveries by individuals and firms. From 1883, in Sidgwick's The Principles of Political Economy, we have the following. scientific discoveries... however ultimately profitable to industry, have not generally speaking a market value: the inventions in which the discovery is applied can be protected by patents; but the extent to which any given discovery will aid invention is mostly so uncertain, that even if the secret of a law of nature could be conveniently kept, it would not be worth an inventor's while to buy it, in the hope of being able to make something of it. [Book II, Ch. III, §3] Beyond this, general purpose knowledge has (at least) two other crucial aspects for economics arguments: first, knowledge regularly has spill-overs, positive externalities, and the firm investing in the research cannot capture all of these; and second, general purpose knowledge may not yield payoff for a much longer time than firms or venture capitalists are willing to plan for even if society is willing to plan for the longer run. 1. Explain how the first factor leads firms to under-invest, from society's point of view, in creating new scientific knowledge. 2. Explain how the second factor leads firms to under-invest, from society's point of view, in creating new scientific knowledge. Your answer should include different discount factors.
D. In many parts of the economy, scientific knowledge is what might be thought of as a general purpose tool. There is old wisdom, still relevant, about the funding of scientific discoveries by individuals and firms. From 1883, in Sidgwick's The Principles of Political Economy, we have the following. scientific discoveries... however ultimately profitable to industry, have not generally speaking a market value: the inventions in which the discovery is applied can be protected by patents; but the extent to which any given discovery will aid invention is mostly so uncertain, that even if the secret of a law of nature could be conveniently kept, it would not be worth an inventor's while to buy it, in the hope of being able to make something of it. [Book II, Ch. III, §3] Beyond this, general purpose knowledge has (at least) two other crucial aspects for economics arguments: first, knowledge regularly has spill-overs, positive externalities, and the firm investing in the research cannot capture all of these; and second, general purpose knowledge may not yield payoff for a much longer time than firms or venture capitalists are willing to plan for even if society is willing to plan for the longer run. 1. Explain how the first factor leads firms to under-invest, from society's point of view, in creating new scientific knowledge. 2. Explain how the second factor leads firms to under-invest, from society's point of view, in creating new scientific knowledge. Your answer should include different discount factors.
Chapter14: Monopoly
Section: Chapter Questions
Problem 14.7P
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