One technology policy that most economists agree with is patent protection. Patent law protects the rights of inventors by giving them exclusive rights to use their inventions for a certain period of time. When a company makes a technological breakthrough, it can patent the idea and capture most of the economic benefits for itself. Patents are said to internalize externalities by giving firms property rights over their inventions. If another company wants to use the new technology, it must obtain permission from the inventing company and pay it a patent fee. Therefore, the patent system provides greater incentives for companies to conduct research and other activities that promote technological progress.
Externalities of Consumption
The externalities we have discussed so far relate to the production of goods. However, some externalities are related to consumption. For example, if consumers prefer drinking and driving and endangering the lives of others, the consumption of alcohol causes negative externalities. Likewise, the consumption of education causes positive externalities because more educated people will produce a better government. Good government benefits everyone.
The analysis of consumption externalities is similar to the analysis of production externalities. As Figure 10-4 shows, the demand curve does not reflect the social value of a good. Panel (a) represents the case of negative consumption externalities, such as those related to alcohol. In this case, the social value is less than the private value, and the social optimal quantity is less than the quantity determined by the private market. Panel (b) represents the case of positive consumption externalities, such as education. In this case, the social value is greater than the private value, and the social optimal quantity is greater than the quantity determined by the private market.