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Archived updates for Monday, October 17, 2005

The Concise Economics of Patents

According to David R. Henderson writing for The Concicise Encyclopedia of Economics, the economic justification for patents is straightforward. If there were no patents, then someone who invested time and money to create an invention would not necessarily get a return on even a very valuable invention.

"Although this argument is airtight, it is, in itself, an insufficient argument for patents. There are two main reasons. First, there is a cost to the patent system. By creating a monopoly, it causes higher prices for consumers and thus a loss to them that outweighs the gain to producers (see Monopoly). One might argue that the loss is fictitious because without the patent the invention would not have been made. But many inventions would be made and have been made without patents. Sometimes such inventions occur intentionally, such as when the inventor thinks he can keep the invention secret long enough (but typically much less than seventeen years) to collect a monopoly return on it. Other times, the inventions occur by accident. Either way, one of the patent system's negative effects is to create monopolies in inventions that would have existed anyway.

Second, as British economist Arnold Plant argued in the thirties, the patent system diverts creative energy into the patentable inventions and away from the kinds of improvements that cannot be patented. An example of such an unpatentable improvement would be a new way of organizing shelf space in a supermarket. There is no assurance that this diversion creates net economic benefits for society."

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