TECHNOLOGY SPILLOVERS INDUSTRIAL POLICY AND PATENT PROTECTION

A potentially important type of positive externality is called a technology spillover the impact of one firm’s research and production efforts on other firms’ access to technological advance. For example consider the market for industrial robots.· Robots are at the frontier of a rapidly changing technology Whenever a firm builds a robot, there is some chance that it will discover a new and better design This new design may benefit not only this firm but society as a whole because the design will enter society’s pool of technological knowledge. That is, the new design may have positive externalities for other producers in the economy In this case, the government can internalize the externality by subsidizing the production of robots. If the government paid firms a subsidy for each robot produced, the supply curve would shift down by the amount of the subsidy, and this shift would increase the equilibrium quantity of robots. To ensure that the market equilibrium equals the social optimum, the subsidy. should equal the value of the technology spillover How large are technology spill overs, and what do they imply for public policy? This is an important question because technological progress is the key to why living standards rise over time Yet it is also a difficult question on which economists often disagree Some economists believe that technology spillovers are pervasive and that the government should encourage those industries that ‘yield the largest spillovers. For instance, these economists argue that if making computer chips yields greater spill overs than making potato chips, then the government should encourage the production of computer chips relative to the production of potato chips The U.S. tax code does this in a limited way by offering special tax breaks for expenditures on research and development.
Some other nations go farther by subsidizing specific industries that supposedly offer large technology spill overs. Government intervention in the economy that aims to promote technology-enhancing industries is sometimes called industrial policy Other economists are skeptical about industrial policy Even if technology spillovers are common the success of an industrial policy requires that the government be able to measure the size of the spillovers from different markets. This measurement problem is difficult at best Moreover, without precise measurements the political system may end up subsidizing industries with the most political clout rather than those that yield the larges! positive externalities Another way to deal with technology spillovers is patent protection. The patent laws protect the rights of inventors by giving them exclusive use of their inventions for a period of time. When a firm makes a technological breakthrough, it can patent the idea and capture much of the economic benefit for itself The patent is said to internalize the externality by giving the firm a property right over its invention If other
want to use the new technology, they would have to obtain permission from the inventing firm and pay it some royalty Thus, the patent system gives firms a greater incentive to engage in research and other activities that advance technology.

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