Chapter 7

Imitators

Get the benefit of new ideas with having to pay the cost of development. Have lower cost so they tend to drive innovators out of the market unless a barrier prevent quick imitation.

Commercial Setting

An institution that help innovators to connect with capitalists.

Countries with high per capita GDP have institutions that...

Make it in people's self interest to invest in human and physical captial and technology.

Pure public good

Non-excludable (cannot prevent anyone else from consuming it), Non-rival (consume an infinte amount of a good)

Throughout human history we know that?

Not unitl the early 19th centuryi were a few countries able to establish sustained long-run economic growth.

Intellectual property rights

Patents: grant temporary monopoly. Delay imitation, allowing innovative firms a greater period of monopoly power. Increase the incentive to research and develop new products.

Trade-off of patents

Reduce spillovers and thus increase the incentives to produce new ideas. But can slow down spread of technology.

Economic growth can be faster

A (ideas)=population x incentives x ideas/hour

Production Function

Expresses the relationship between output and the factors of production.

Why does the Government have a role?

Ideas in mathematics, physics, and molecular biology have many applications so spillovers can be large. Problem: Even if the social benefits are large, the private benefits can be small.

Non-rivalrous

If two or more people can consume it at the same time. Ideas are non-rivalrous goods.

How Economic growth can be faster?

Incentives appear to be increasing. New ideas do not experience diminishing returns. 1. many ideas make creating new ideas easier 2. the field of ideas that can be explored is so large that diminishing returns may not set in for a very long time.

Keys to increasing technological knowledge:

Incentives. Institutions that encourage investment in physical and human capital and R&D.

Incentives are increasing. How?

Increasing trade. Increasing wealth in developing countries.

Market Size and Research and Development

Innovations require large R&D expenditures. Companies will avoid investing in innovation with small potential markets. Larger markets mean increased rewards (thus incentives) for R&D As the world market grows companies will increase their R&D investments.

Research and Development is....

Investment for profit. Profits provide incentives to invest in R&D.

Government's role

Subsidize the production of new ideas or give tax breaks for R&D. Will shift the (private) marginal cost of R&D cure down = increase private investment.

Spillovers: Good

The spillover of diffusion of new ideas generates widespread economic growth Implication: Spillovers mean that the generator of the idea doesn't get all the of the benefits.

Results of Spillovers

Too few ideas are produced. The originator of an idea doesn't get all the benefits - ideas will be underprovided. Results in too little investment in R&D.