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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.

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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

how can chip be made from sand
Eke Reply
are nano particles real
Missy Reply
Hello, if I study Physics teacher in bachelor, can I study Nanotechnology in master?
Lale Reply
no can't
where we get a research paper on Nano chemistry....?
Maira Reply
nanopartical of organic/inorganic / physical chemistry , pdf / thesis / review
what are the products of Nano chemistry?
Maira Reply
There are lots of products of nano chemistry... Like nano coatings.....carbon fiber.. And lots of others..
Even nanotechnology is pretty much all about chemistry... Its the chemistry on quantum or atomic level
no nanotechnology is also a part of physics and maths it requires angle formulas and some pressure regarding concepts
Preparation and Applications of Nanomaterial for Drug Delivery
Hafiz Reply
Application of nanotechnology in medicine
has a lot of application modern world
what is variations in raman spectra for nanomaterials
Jyoti Reply
ya I also want to know the raman spectra
I only see partial conversation and what's the question here!
Crow Reply
what about nanotechnology for water purification
RAW Reply
please someone correct me if I'm wrong but I think one can use nanoparticles, specially silver nanoparticles for water treatment.
yes that's correct
I think
Nasa has use it in the 60's, copper as water purification in the moon travel.
nanocopper obvius
what is the stm
Brian Reply
is there industrial application of fullrenes. What is the method to prepare fullrene on large scale.?
industrial application...? mmm I think on the medical side as drug carrier, but you should go deeper on your research, I may be wrong
How we are making nano material?
what is a peer
What is meant by 'nano scale'?
What is STMs full form?
scanning tunneling microscope
how nano science is used for hydrophobicity
Do u think that Graphene and Fullrene fiber can be used to make Air Plane body structure the lightest and strongest. Rafiq
what is differents between GO and RGO?
what is simplest way to understand the applications of nano robots used to detect the cancer affected cell of human body.? How this robot is carried to required site of body cell.? what will be the carrier material and how can be detected that correct delivery of drug is done Rafiq
analytical skills graphene is prepared to kill any type viruses .
Any one who tell me about Preparation and application of Nanomaterial for drug Delivery
what is Nano technology ?
Bob Reply
write examples of Nano molecule?
The nanotechnology is as new science, to scale nanometric
nanotechnology is the study, desing, synthesis, manipulation and application of materials and functional systems through control of matter at nanoscale
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Source:  OpenStax, Principles of microeconomics for ap® courses. OpenStax CNX. Aug 24, 2015 Download for free at http://legacy.cnx.org/content/col11858/1.4
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