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  • In countries that already have patents, economic studies show that inventors receive only one-third to one-half of the total economic value of their inventions.
  • In a fast-moving high-technology industry like biotechnology or semiconductor design, patents may be almost irrelevant because technology is advancing so quickly.
  • Not every new idea can be protected with a patent or a copyright—for example, a new way of organizing a factory or a new way of training employees.
  • Patents may sometimes cover too much or be granted too easily. In the early 1970s, Xerox had received over 1,700 patents on various elements of the photocopy machine. Every time Xerox improved the photocopier, it received a patent on the improvement.
  • The 21-year time period for a patent is somewhat arbitrary. Ideally, a patent should cover a long enough period of time for the inventor to earn a good return, but not so long that it allows the inventor to charge a monopoly price permanently.

Because patents are imperfect and do not apply well to all situations, alternative methods of improving the rate of return for inventors of new technology are desirable. Some of these possible alternative policies are described in the following sections.

Policy #1: government spending on research and development

If the private sector does not have sufficient incentive to carry out research and development, one possibility is for the government to fund such work directly. Government spending can provide direct financial support for research and development (R&D) done at colleges and universities, nonprofit research entities, and sometimes by private firms, as well as at government-run laboratories. While government spending on research and development produces technology that is broadly available for firms to use, it costs taxpayers money and can sometimes be directed more for political than for scientific or economic reasons.

Visit the NASA website and the USDA website to read about government research that would not take place where it left to firms due to the externalities.

The first column of [link] shows the sources of total U.S. spending on research and development; the second column shows the total dollars of R&D funding by each source. The third column shows that, relative to the total amount of funding, 26% comes from the federal government, about 67% of R&D is done by industry, and less than 3% is done by universities and colleges. (The percentages below do not add up to exactly 100% due to rounding.)

(Source: http://www.nsf.gov/statistics/infbrief/nsf13313/)
U.s. research and development expenditures, 2011
Sources of R&D Funding Amount ($ billions) Percent of the Total
Federal government $133.6 32%
Industry $249 60.2%
Universities and colleges $12.5 3%
Nonprofits $15.1 3.6%
Nonfederal government $3.8 0.91%
Total $414

In the 1960s the federal government paid for about two-thirds of the nation’s R&D. Over time, the U.S. economy has come to rely much more heavily on industry-funded R&D. The federal government has tried to focus its direct R&D spending on areas where private firms are not as active. One difficulty with direct government support of R&D is that it inevitably involves political decisions about which projects are worthy. The scientific question of whether research is worthwhile can easily become entangled with considerations like the location of the congressional district in which the research funding is being spent.

Policy #2: tax breaks for research and development

A complementary approach to supporting R&D that does not involve the government’s close scrutiny of specific projects is to give firms a reduction in taxes depending on how much research and development they do. The federal government refers to this policy as the research and experimentation (R&E) tax credit. According to the Treasury Department: “. . . the R&E Credit is also a cost-effective policy for stimulating additional private sector investment. Most recent studies find that each dollar of foregone tax revenue through the R&E Tax Credit causes firms to invest at least a dollar in R&D, with some studies finding a benefit to cost ratio of 2 or 2.96.”

Visit this website for more information on how the R&E Tax Credit encourages investment.

Policy #3 cooperative research

State and federal governments support research in a variety of ways. For example, United for Medical Research, a coalition of groups that seek funding for the National Institutes of Health , (which is supported by federal grants), states: “NIH-supported research added $69 billion to our GDP and supported seven million jobs in 2011 alone.” The United States remains the leading sponsor of medical-related research spending $117 billion in 2011. Other institutions, such as the National Academy of Scientists and the National Academy of Engineers , receive federal grants for innovative projects. The Agriculture and Food Research Initiative (AFRI) at the United States Department of Agriculture awards federal grants to projects that apply the best science to the most important agricultural problems, from food safety to childhood obesity. Cooperation between government-funded universities, academies, and the private sector can spur product innovation and create whole new industries.

Key concepts and summary

Public policy with regard to technology must often strike a balance. For example, patents provide an incentive for inventors, but they should be limited to genuinely new inventions and not extend forever.

Government has a variety of policy tools for increasing the rate of return for new technology and encouraging its development, including: direct government funding of R&D, tax incentives for R&D, protection of intellectual property, and forming cooperative relationships between universities and the private sector.


The marginal private costs and the marginal private benefits of a firm producing fuel-efficient cars is represented in the following diagram (show the equilibrium P_market, Q_market). The government would like to increase the amount of fuel-efficient cars to be produced and sold to Q_social. One way that the government can try to increase production of fuel-efficient cars is by making them cheaper to produce, by subsidizing their production. Show, on the same graph, the amount of subsidy needed to increase the equilibrium quantity of fuel-efficient cars to Q_social. Hint : the government is trying to affect production through costs, not benefits.

Got questions? Get instant answers now!


United States Department of the Treasury. “Research and Experimentation Tax Credit.” Accessed November 2013. http://www.treasury.gov/press-center/news/Pages/investing-in-us-competitiveness.aspx.

U.S. Patent and Trademark Office. 2015. “U.S. Patent Statistics: Calendar Years 1963–2014.” Accessed April 10, 2015. http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.pdf.

United for Medical Research. “Profiles of Prosperity: How NIH-Supported Research Is Fueling Private Sector Growth and Innovation.” Introduction. Accessed January 2014. http://www.unitedformedicalresearch.com/wp-content/uploads/2013/07/UMR_ProsperityReport_071913a.pdf.

Questions & Answers

Helloo, im new, can i get to know more?
Saniya Reply
You ask questions on any topics you find difficult.
is price elasticity of demand the same as elasticity of demand
Favour Reply
not really
i hope everyone be ok
please explain
explanations please
price elasticity of demand is the reaction of customers /demand to price changes(increase or decrease) elasticity of demand is the reaction of prices brought about by the change in demand
thank you
state the laws of demand and supply
dd: when price rises demand decreases whereas when price reduces dd rises ss: when ss rises the price rises and when ss decreases price also reduces. There is a positive relationship
Draw a demand curve graph
though price elasticity and elasticity are used interchangeably, the demand can respond to income changes and prices of related goods as well.
explain the difference between merit goods and public goods and show why it is possible for profit to be made in the supply of one of these types of good but not the other
Public goods are defined as products where, for any given output, consumption by additional consumers does not reduce the quantity consumed by existing consumers. Merit goods are, for example, education and to some extent the health-care. They are provided by state as "good for you".
The ladies are doing much better than the men
what happens when there is a shift in demand curve?
What is Specialization ? Explain in detail
any one ?
specialisation is a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency.
what is economic
Seray Reply
It is a social science which studies human behavior as a relationship between ends and scarce which have alternative uses
what is norminal wage
Demba Reply
is the wages measured in money as distinct from actual purchasing power
what is demand curve
Azeez Reply
this is a curve that slop downward from left to rich
different between capital and wealth
Samuel Reply
Wealth refers to the amount of asset you have, while, capital is the amount of cash money you have with you now and willing to invest in any business.
What is scale of reference?
Finda Reply
What is monopoly?
It is the control of market by single seller or producer
the exclusive possession or control of the supply or trade in a commodity or services
what is scarcity
Bonny Reply
scarcity means that the resources which we can produce goods and services relatives to wants for them.
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
needs of people ar called demand
what's the difference between opportunity cost and production possibility curve?
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
different between capital and wealth
apportunity cost means the profit lose when one alternative is selected over other
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
It deals with making choices in the face of scarcity
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
what is scarcity
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
what is perfect complements?
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
economics is important on expenditure analysis
because it is to make choice
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Economic is important because of the fact of scarcity and desire for efficiency...
it enable us to make rational choice
what is unemployment
unemployment occurs when a person is actively searching for employment is unable to find work .....
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
It is important because economics provide solutions about scarcity.
which of the following measures will the government take during inflation?

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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