How do economists view externalities?

One technical policy that most economists agree with is patent protection. The patent law protects the rights of inventors and allows them to use their inventions exclusively for a certain period of time. When an enterprise makes a technological breakthrough, it can apply for a patent for this idea and occupy most of its economic benefits. It is said that patents internalize externalities by giving enterprises the property rights of their inventions. If other enterprises want to use new technology, they must get the permission of the invention enterprise and pay the patent fee to it. Therefore, the patent system greatly encourages enterprises to carry out research and other activities to promote technological progress.

Externality of consumption

So far, the externalities we have discussed are related to the production of goods. However, some externalities are related to consumption. For example, consumers prefer to drink and drive, endangering the lives of others, then the consumption of alcohol will cause negative externalities, and the consumption of education will also cause positive externalities, because the increase of educated people will produce a good government, and a good government will benefit everyone.

The analysis of consumption externalities is similar to that of production externalities. As shown in figure 10-4, the demand curve cannot reflect the social value of an article. (a) Amplitude indicates negative consumption externalities, such as those related to alcohol. In this case, the social value is less than the private value, and the social optimum is less than the quantity determined by the private market. (b) The picture shows the situation that externalities are being consumed, such as education. In this case, the social value is greater than the private value, and the social optimum is greater than the quantity determined by the private market.