Principles of Microeconomics / Unit 12 MIC 1108 worked example, 60 to 90 seconds
Which Remedy Fits
The idea
Given a spillover, ask three questions. Can the benefit be made excludable? If the output is a product, a patent or copyright lets the creator capture more of it. Is there a product at all? Basic research with no product needs direct funding, since nothing can be patented. Does the benefit land on identifiable buyers? If consumers create the spillover, as with vaccines, a subsidy to buyers works; if firms create it, a tax credit or cooperative program does. Then state the remedy's trade-off.
In practice
Worked example, four cases. A drug that takes a decade to develop and can be copied in a month: a patent, with the trade-off of a monopoly price for its term. Research into the structure of a protein with no product in sight: direct funding, with the trade-off that taxpayers pay and politics chooses. Flu shots: a voucher to buyers equal to the spillover, with the trade-off of the treasury cost. An industry standard that every firm needs and no firm wants to pay to develop alone: a cooperative research program, with the trade-off that cooperation among rivals must be watched for collusion.
Where people slip
A patent fixes underinvestment by creating a monopoly, trading one market failure for another for a time; that is the design. And no remedy makes the spillover disappear; each moves the creator's return closer to the social return.
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