A monopoly exists when there is only one firm in an industry and there is a barrier to other firms entering. Rent-Seekers attempt to influence government policy to create or maintain such barriers. This is the case of Indigo Books and Music Inc., and the B.C. Association of Optometrists that we referred to in previous posts. There is, however another way for a barrier to entry to be obtained and that is the granting of a patent.
A patent is an exclusive license to produce a product or use a process for a specified period (20 years from date of application). To obtain a patent, you must have an original invention and make an application to the Federal Government. As with rent-seeking, a patent restricts competition and allows for monopoly profits. They will both also create a dead-weight loss. The following illustration of the deadweight loss triangle can be found in any Micro Principles text.
This is where the difference lies. The dead-weight loss from rent-seeking is hard to justify. The dead-weight loss from a patent is easy to justify. Patents are issued for innovation, the result of research and development. Since R&D typically has positive spillover effects, the economy as a whole benefits and the dead-weight loss of the monopoly is at least partially, if not fully, offset.
The growth can be illustrated by looking at the effects of a technological change on the production possibilities curve, or by application of the Solow production function.
There is a time limit on patents to encourage further research. Typically, firms that are granted patents use some of the monopoly profits to fund their research departments. This reinvestment sustains growth over the long term.
A Globe and Mail article explaining the use of patents can be found by clicking here.
Michael,
ReplyDeletePatents are not a license, they are a property right. The patent statute defines a patent as personal property, there is a recording system and rules just like real property. The US Constitution gives inventors a “Right” to their invention (US Constitution Article 1, Section 8, Clause 8). Property rights are derived from Natural Rights – you own yourself so you own the products of your labor, both physical and mental.
There are some economists who believe that property rights are based on scarcity. This is incorrect historically and logically. For more information see http://hallingblog.com/2009/06/22/scarcity-–-does-it-prove-intellectual-property-is-unjustified/
The intended audience is my first year students. Patents are actually property rights as Dales suggests, and it represents a depreciating asset. The only scarcity that exists with respect to patents is intellectual ability.
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